Thoughts on the Market: December Edition
We closed out 2024 with a second consecutive annual return of 25% for the benchmark S&P 500. As in 2023, size mattered, as evidenced by the 62% return for the ten largest companies in the Index. The other 490 companies, which still include some big winners like Walmart (+73%), Netflix (+88%), GE (+66%) and American Express (+40%), to name a few, rose 12% on average. The market exited the year with a P/E ratio of 21x.
We can slice and dice the market in many different ways, but essentially there are handful of companies that are driving the market rally. And they are unquestionably great companies with innovative, profitable business models. However, lessons from the past have taught us that an investor needs to have a strong belief in a differentiated view of an investment to justify paying a large premium for a stock. Either the very near-term financial performance needs to be much better than Wall Street expects, or the long-term potential needs to be better than the average investor expects. In 2025, companies that trade at elevated P/E multiples will need to perform or they risk underperforming.
There are some examples that we can point to where companies have justified their high multiples. Broadcom, a Global Equity Growth Fund holding, saw its share price rise 50% in December after highlighting the massive opportunity in AI chip design with its current customers. Broadcom indicated it could generate $45-50 billion in incremental sales by 2028 from its current roster of three customers in AI chip design. Following these comments, Wall Street analysts raised their revenue forecasts by 10% (which still discounts the revenue potential) and its P/E multiple rose further to 34x. It had started the month at an already elevated 29x.

Similarly, a look back at Netflix highlights how companies can generate value over the long term without the need for short-term catalysts. In 2019, Netflix traded at a P/E of 80x (the shares trading at US$360) as investors paid a premium for its leadership in streaming. Fast forward five years, and Netflix shares have tripled as its leadership has only grown with its expansion into new segments like advertising and live sports. These service lines were not contemplated five years ago but highlight the optionality leading companies must build into their products to develop new revenue streams. Netflix still trades at a high P/E of 38x, but its growth in profitability has provided a strong shareholder return, with the stock now trading above US$800, even with the multiple being compressed by 50%.
Netflix and Broadcom highlight two success stories of investing in high multiple companies. However, lessons from the Nifty Fifty period of the 1970s and the Dot-Com Bubble in 2000 remind us that we need to stay vigilant on the price we pay for a company. For example, Home Depot shares fell 66% between 1999 and 2003 despite cumulative sales growth of 50% and earnings per share growing from $1.00 to $1.88 in that time frame. Individual share prices can de-rate without a large market correction. More recently, former darlings in the consumer staples sector like Dollar Store operator Dollar General and alcohol purveyor Diageo have seen their multiples contract from the mid-20s to the low to mid-teens as their profit growth slowed.
The takeaway is that stocks must generate superior profit growth to justify and sustain high valuations. Some companies can meet or even raise the bar, but for those that cannot, share prices may languish for three years or more.
GLOBAL EQUITY GROWTH FUND

The MWG Global Equity Growth Fund rose 3.1% in December, above the -0.8% fall in its benchmark. In 2024, the Fund returned 31.7% versus the benchmark return of 27.6%. The Fund’s top three performers in the month were Broadcom (+47%), Lululemon (+23%) and Alphabet (+15%), while UnitedHealth (-14%), Uber (-14%) and Air Canada (-11%) were the biggest detractors.
Portfolio Managers’ Summary
The portfolio finished the year strong, with its largest monthly outperformance in 2024. Broadcom was the standout, as it reported its 2024 fiscal results and guided to a larger opportunity in AI chip design than the market expected. Broadcom’s top customers in this product category include Alphabet, Meta and Bytedance (TikTok).
During the month, we bought shares in Tapestry, the parent company of Coach and Kate Spade handbags as well as Stuart Weitzman shoes. We believe momentum is accelerating in the Coach brand, with higher sales, less discounting and improved traction with Gen Z customers. The shares trade at a low multiple of 14x earnings per share. To fund the purchase, we sold our shares in Lululemon following a 60% increase from our initial purchase in the summer of 2024. The shares hit our revised target price, and we saw no justification to continue chasing the stock.
INCOME GROWTH FUND

The MWG Income Growth Fund fell 0.4% in November, besting the 2.5% decline in its benchmark. The Fund returned 25.7% year-to-date, above the benchmark increase of 24.6%. Kering (+8%), Evertz (+5%) and Gibson (+5%) were the top performers, while Doman Building Materials (-12%), Northland Power (-11%) and Northwest Healthcare REIT (-11) were the top detractors. The fund yield was 5.9% at month end.
Portfolio Managers’ Summary
The portfolio was constrained by a reverse in macro conditions in December. Primarily, long-term interest rates in the U.S. rose for the fourth consecutive month on both the economic optimism and uncertainty surrounding the Trump Administration’s second term. This affects the portfolio on two fronts. First, many companies in the portfolio carry higher debt levels given the solid cash flow generation by their assets (think pipelines or real estate). Higher interest rates imply higher refinancing rates in the future. Second, the valuation of these assets is closely tied to interest rates. We expect short-term rates to continue trending lower through 2025 as inflation continues to recede. As well, companies have adjusted their capital structure to a higher level of long-term interest rates and thus the “shock” factor is absent, unlike in 2022. Our portfolio companies are much better prepared to face elevated interest rates.
On the energy front, prices have firmed up and equities in this sector look poised to perform in synch with improving fundamentals. Approximately one-third of the portfolio touches energy and power production and distribution.
This Month’s Portfolio Update is written by our Head of Research, Jamie Murray, CFA.
The purpose is to provide insight into our portfolio construction and how our research shapes our investment decisions. As always, we welcome any feedback or questions you may have on these monthly commentaries.