We believe clients should first protect hard earned assets—diversification is still key!
As the S&P 500 continues its impressive rally, diversification strategies such as investing in dividend-paying stocks, value stocks, small-caps, and international markets have often taken a back seat. In today’s market, many portfolios are heavily influenced by a small group of high-performing stocks. This begs the question: why bother with anything else?
For perspective, in 2024, the S&P 500 returned 25%, while the S&P 500 Dividend Aristocrats Index—which tracks 66 companies with over two decades of consistent dividend increases—gained less than 7% (with dividends).
During a recent portfolio review, one client asked in a very innocent way, why are we holding a telecom stock—it pays nearly a 7% dividend but has suffered in stock price. Why do we hold a can and jar company that’s been around since 1880? The sentiment was clear: these investments seem boring compared to Artificial Intelligence, Data Centers, and Crypto Currency—and recent returns reflect investor neglect and much less exciting fundamentals.
Could this seemingly one-sided narrative change in 2025?
A Case for Diversification
Two key factors could potentially narrow the performance gap between growth-focused and diversified portfolios:
1. Valuations:
The S&P500 currently trades at 24.5x forward earnings, with the Technology sector—a major driver of recent returns—trading at over 30x forward earnings.
In contrast, sectors like Health Care, Financials, and Utilities, which are home to more value-oriented, dividend-paying companies, trade closer to 18x forward earnings.
If concerns about overheating markets grow, investors may gravitate toward these undervalued sectors.
2. Earnings Growth:
Over the past two years, mega-cap Technology companies, especially the “Magnificent Seven,” have led the charge in earnings growth, with 35% growth in 2023 and an estimated 29% in 2024. Meanwhile, the rest of the S&P 500 posted much more modest growth (-4% in 2023 and 2% estimated for 2024).
As earnings growth potentially broadens across sectors, we could see a shift in investor preferences. In fact, early signs of this rotation emerged in Q3 of 2024, when value stocks outperformed growth, and sectors outside Technology drove quarterly gains. Select small- to mid-sized companies have 2025 earnings estimates that are very attractive compared to the Mega stocks that everyone is focused upon.
Navigating 2025 with Glenwood Financial Partners
Portfolios will remain committed to the strength of 2024’s growth themes, and clients can readily view those holdings in your portfolios. Additionally, for 2025 positioning, we lean on the history that diversification matters—especially in times of uncertainty. In 2022, for example, fears of a recession drove outperformance in sectors like utilities and consumer goods, where value and “quality” earnings can steadily thrive. The Dividend Aristocrats we mentioned earlier were up 1.82% while the S&P 500 was down -18.1% (with dividends) and bonds as measured by the widely-followed Bloomberg Aggregate Bond Index were down -13%.
As the new administration implements its economic agenda, we anticipate periods of market volatility and uncertainty that could renew interest in diversified strategies.
Bottom Line for You:
We believe the “bear market” in diversification may subside in 2025 as investors revisit dividend-payers, small to mid-sized companies, and other potentially undervalued areas of world markets.
By focusing on high-quality companies—regardless of whether they fall under “growth” or “value” descriptions—we are committed to balancing opportunity and stability in a diversified approach that’s uniquely personalized to each and every client.
Let’s Discuss Your 2025 Strategy
Markets will evolve, and so will your unique financial story: We are here to listen, advise, and craft wealth management strategies tailored to your needs.
Client or friend of the firm, if you’d like to explore how these shifting market dynamics might impact your portfolio, please don’t hesitate to reach out. Together, we can navigate 2025 with clarity, discipline, and confidence.
We appreciate all our friends and collaborators that help make Glenwood’s mission possible; after all, Wealth management – it’s not just money. It includes values, traditions, knowledge, memories, and so much more.
And to all of our non-client friends: It’s just a conversation.
We welcome all to a cordial update discussion of our continuing investment discipline and our commitment to a truly personalized relationship with each and every client.
3717 National Drive, Suite 211
Raleigh, NC 27612
919-268-4100
