To Our Clients and Friends of Parthenon LLC
In ancient Rome, gladiators stood as symbols of strength, skill, and resilience. From humble beginnings, these warriors—often criminals, prisoners of war, or fame-seekers—fought not just for survival, but for glory. The Colosseum in Rome, which was inaugurated in 80 A.D., became the ultimate stage for these contests. It is estimated it could hold 50,000 to 80,000 spectators at various points in its history.
Because of the fighter’s value to their financial investors, most gladiator matches did not end in death. However, success or failure was determined by a powerful and often fickle audience. Celebrity status was bestowed on the strongest and the smartest who survived. Similarly, as we look back on the markets in 2024, we saw that the “strongest and smartest” names of 2023 extended their streak. We see other parallels as well with the markets and facets of the gladiatorial experience.
The Arena: Stock Market Performance
Much like the rise of a gladiator in the arena, the S&P 500’s performance in 2024 was impressive to watch. For the second consecutive year, the S&P 500 returned 25%+, while setting 57 new all-time highs.
The first three quarters of the year were marked by a broad-based rally, with a diverse array of names contributing to gains – a reversal of the previous year’s narrative. Yet, as the fourth quarter arrived, volatility returned. In the latter half of the year, technology and communication services once again rose to the forefront, leading the charge. The largest five companies in the S&P 500 accounted for over 23% of the market value of the Index and roughly 50% of S&P 500 returns by the end of the year. Like last year’s rally, the potential impact and application of Artificial Intelligence (AI) across a range of industries continued to provide the momentum for these tech giants.
Even in its strength, the market faced uncertainty. Geopolitical tensions and economic concerns threatened to disrupt the upward trajectory. In December, the Federal Reserve’s announcement that any future interest rate cuts would be at a more measured pace than previously expected created an adjustment in market expectations, as the rally began to take a more cautious tone.
The Gladiator’s Preparation: Bond Market and Federal Reserve Actions
Gladiator training was intense and focused as much on strategy as physical strength. Using wooden weapons (to prevent injury), doctores (who were mostly retired fighters) instructed them in the art of defeating their foes. The market also faced an intimidating competitor in 2024 – one of the most aggressive rate-hiking cycles in nearly 50 years. The Federal Reserve’s actions, pushing the Federal Funds rate to 5.5% by the end of 2023, set the stage for a year of uncertainty for the bond market. Despite these aggressive rate hikes, which would typically create economic disruptions and headwinds, the U.S. economy remained resilient. At last reading, GDP grew 2.8% annualized and unemployment remained low at 4.0% – signs that a resilient labor market continued to support economic growth.
The bond market adjusted to the shifting environment. By 2024, the market had largely digested the impact of these hikes. The Fed initiated three rate cuts throughout the year, totaling 100 basis points (or 1%). Inflation, which had been a significant challenge, continued to slow, with CPI ending the year at 2.9%. After all these gyrations, the Bloomberg US Aggregate Index of bonds returned 1.25% for 2024.
The Combatants: Market Risks and Uncertainties
The typical movie archetype for ancient gladiators is a muscular, athletic figure that enters combat with a heavy sword and shield. However, in real life, the ideal gladiator had a protective layer of body fat (a way to withstand superficial wounds) and used different weapons in battle, including tridents, nets, and spears.
Similarly, investors will wrestle with a diverse range of questions and challenges in 2025. Most notably, we think of:
- Inflation: Although ending the year at a manageable 2.9%, a sustained spike in this reading could derail economic growth. When significant inflation hits, it creates uncertainty for business and consumers, who then reduce their investment and spending.
- Geopolitical Risks: Although conflicts in the Middle East and Ukraine have not really affected the markets, we will continue to watch if other disruptions might arise.
- Economic Policy: Tariffs, taxes, and deregulation are three wild cards in the economic outlook. Tariffs have already added some volatility to the markets at the start of the new year.
- Earnings Growth: This measure continued at a brisk pace in 2024. Can this be sustained? And similarly, can valuations continue to grow?
- Top Heavy Index: Will mega-caps continue their dominance? And will AI continue to be a force that drives market appreciation?
Parthenon’s Strategy for 2025 and Beyond
Victory in the gladiatorial arena was hard fought, but those that were successful are still studied today. Through archaeological evidence, historical texts, and even ancient graffiti, we know some of the stories of successful ancient warriors and the strength, preparation, and agility that they displayed. These time-tested characteristics are important to us as investors today, especially in an environment where we have seen an average return of 12.4% over the past 50 years. With above average returns in recent history, we are prepared for the possibility of lower returns going forward.
After gladiators won their match, they received a cash prize, a palm of victory and, if impressive enough, a laurel wreath. Although there is a lack of laurel wreaths in our office, we continue to build on our long-term track record and focus on equipping our portfolios for the battles ahead. As we look toward 2025, we are prioritizing companies with strong fundamentals, capable management, and the agility to thrive in a dynamic environment. Because valuations are at the higher end of recent history, we will continue to be cautious, but also watchful for opportunities that might arise. As we move into 2025, we will continue our battle-tested approach that has served us well over more than 25 years.
Download a PDF of this market review HERE.
