2024 MARKET RECAP

2024 delivered another strong year for stock investors across the market cap spectrum. U.S. large cap equities, as proxied by the S&P 500 Index, returned +25.0%1 while U.S. small/mid (smid) and small cap equities, as proxied by the Russell 2500 and Russell 2000 Indexes, returned +12.0%1 and +11.5%1, respectively. The year began with a broadening out of the large cap market, as pockets outside of the mega-cap technology companies helped drive returns—an environment supportive of Bahl & Gaynor’s portfolios in the large cap space. Among smid and small cap equities, defensive undertones became more prevalent amid a rise in potential economic, political, geopolitical uncertainties, also benefiting Bahl & Gaynor’s approach in this capitalization segment.

However, as the U.S. Presidential Election neared, large cap market breadth narrowed while smid and small caps regained their prior risk-on stance. Much of this narrowness and risk-on dynamic centered upon resurgent growth expectations and optimism about the prospective benefits of artificial intelligence. This presented a relative headwind to Bahl & Gaynor’s strategies. This outcome is not surprising given beta, or market risk, was the strongest factor driving broad equity returns in the second half of the year, and we place significant focus on managing the risk profile of client equity exposure.

Irrespective of the market dynamics at hand, we remain focused on the outcomes we seek to deliver to investors over the long term.

• Income generation across our portfolios remains well above that of benchmark yields, a valuable attribute amid falling rates where investors are searching to replace or diversify their income sources.
• Growth of portfolio income sits above inflation, as has generally been the case over the last five years of inflationary flourish, signaling business durability and confidence in the future, tangibly delivered as a growing dividend to shareholders.
• Our portfolios have delivered downside protection when volatility has presented itself, even if briefly, demonstrating our continued commitment to managing risk throughout market cycles.

The returns of our portfolios reflect the growth of each underlying portfolio company’s cash flow and our risk posture during a strong growth phase of the market cycle. We are pleased our portfolio companies continue to provide the valuable optionality of spendable cash flow income or reinvestment for further compounding to shareholder clients. Moreover, the growth of these dividend payments is an important signal of increasing enterprise value via growing cash production of portfolio businesses. Though the way the market values this compounding can be fickle in the near or even medium term, we strongly believe in patience and risk management to consistently deliver client outcomes.

This remains a period where market concentration, sentiment, and human ingenuity has delivered above-average results to many investors. We remain focused on delivering outcomes that monetize this strength (through dividends) and preserves progress made (through risk management).

MARKET OUTLOOK

As we enter 2025, we believe earnings growth will be a top-of-mind consideration for investors because:

• The avoidance of a recession was an upside surprise in 2023 and 2024, and sentiment may indicate this outcome is already priced in for 2025. Therefore, achieving a no-recession outcome may provide little lift, while failing to achieve it could be a significant negative surprise.
• Interest rate cuts have been a tailwind recently, but policy is closer to neutral now versus at the outset of the rate cut cycle. Incremental rate cuts may already be priced in, but additional rate cuts that are not priced in may be delivered for less benign reasons (e.g. recession).
• Inflation has come down in an orderly fashion and long-term inflation expectations remain well-anchored. This has been an upside surprise in the last two years, but there may be little margin for error regarding deviations from this disinflationary narrative in the future. Potential tariffs, the lagged effects of previous rate cuts, or the historical tendency for multiple inflation waves could challenge this narrative.
• Strong recent returns have left valuations at the higher end of the range for the large cap market. Though valuations are higher for good reasons, their current level may limit the scope for further gains. Empirically, it would not be surprising for multiples to drift higher still if a recession is avoided, but multiples tend to be pro-cyclical, so any economic contraction, or worries of one, could compress multiples.

HOW BAHL & GAYNOR IS POSITIONED

Pictured below, the recent composition of large cap equity returns has been driven overwhelmingly by price return versus dividend return. This is far afield from the nearly century-long average (far right).

A particular mix of return source is not necessarily favorable or unfavorable. For example, a greater mix of price appreciation could reflect substantial opportunities for business investment (e.g. cloud computing or artificial intelligence) versus paying cash out as current dividends. Ideally, these business enhancements permit more substantial dividends in future periods. Importantly though, the mix of return sources does appear to cyclically fluctuate over long periods of time. If appreciation return source has been dominant over the last 15 years, it is possible that dividends and dividend growth could be poised to play a more prominent role in the next 15 years.

Bahl & Gaynor’s investment philosophy leverages both return sources via an important relationship: the stability and persistence of dividend growth driving price appreciation, or the market’s (fickle) gauge of value creation.

Smid and small cap equities exist today at another interesting potential inflection point. While the last five and even seven years have seen higher large cap returns relative to smid and small caps, this dynamic is typically cyclical and mean-reverting in nature. Market data back to 1927 not only confirms small cap stocks have generated greater returns than the larger cap total equity market, but smid dividend stocks have performed competitively and constrained beta (or volatility) akin to total equity market exposure (pictured below).

Bahl & Gaynor applies its dividend growth philosophy to the smid and small cap market based on a belief that returning capital to shareholders and growth are not mutually exclusive outcomes for investors. In fact, we believe dividends and dividend growth work together to align management with shareholders by ensuring shareholder capital is deployed to sustainably maximize future value. This is an unconventional perspective, but alpha generation is predicated on investor positioning that is different than some conventional wisdom.

We appreciate the ongoing support of current clients, who remain committed to our investment philosophy and strategies, and we warmly welcome new clients, especially at such an opportune time for our approach to support critical client outcomes. While we share the hope for market strength that continues to advance progress toward investor goals, we work tirelessly to seek opportunities aimed at backstopping progress made thus far, and we do so through the controllable elements of our investment process: portfolio income generation, growth of portfolio income, and downside protection.

SOURCES

¹Data from 12/31/2023 –12/31/2024. Source: FactSet. Information sourced from third party.

²Data from 12/31/1925 – 12/31/2024. Source: Ned Davis Research, Inc (Prior to 9/30/2018), FactSet (Post 9/30/2018). Information sourced from third party. Contact Us

³Data from 6/30/1927 -2/29/2024. Source: Ken French’s Website – http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/index.html; Total Equity Market Index is representative of US public equity securities listed on the NYSE, AMEX or NASDAQ exchange; Small Stocks is representative of US public equity securities with a market capitalization in the bottom 30% (excluding REITs) of the NYSE and includes all NYSE, AMEX, and NASDAQ stock that fit the market cap criteria; Small Cap Mid-Dividend Yield is representative of companies with a dividend yield in the middle 40% of dividend payers with a market capitalization in the bottom 50% of the NYSE (excluding REITs) and includes all NYSE, AMEX, and NASDAQ stocks that meet these criterion, all three indexes are reconstituted annually in June. Monthly returns are calculated on a value-weighted basis.

IMPORTANT DISCLOSURES AND DEFINITIONS

Investment advisory services provided through Bahl & Gaynor (“B&G”), a federally registered investment adviser under the Investment Advisers Act of 1940. Registration does not imply any level of expertise or that a particular adviser or advisory firm possesses any special skill or training. More information about B&G can be found by visiting www.adviserinfo.sec.gov and searching by the adviser’s name. This is prepared for informational purposes only and does not address specific investment objectives, financial goals, or needs.

The information provided herein is for informational purposes only and does not constitute an offer or solicitation to buy or sell any securities. The views expressed reflect the opinions of Bahl & Gaynor as of the date of this communication and are subject to change. Bahl & Gaynor assumes no liability for the interpretation or use of this report.

Past performance is not indicative of future results. The performance data referenced reflects historical results and is not indicative of future performance. There is no guarantee that any investment strategy will achieve its objectives or provide a specific return. The information provided regarding market conditions, interest rates, inflation, and valuations reflects the current expectations, which may change.

Any forward-looking statements, including those related to earnings growth, interest rates, inflation, and market trends, are based on Bahl & Gaynor’s analysis and assumptions, which may or may not prove to be accurate. These statements are speculative in nature, and there can be no assurance that the outcomes predicted will occur.

All data regarding benchmarks, such as the S&P 500 Index, Russell 2500 Index, and Russell 2000 Index, is sourced from reliable third-party providers and is believed to be accurate; however, discrepancies or changes may occur. Benchmarks are provided for comparison purposes only and may not reflect the actual composition or performance of Bahl & Gaynor’s portfolios.

Statements regarding income generation, downside protection, or inflation-adjusted income are based on historical trends and should not be construed as guarantees or future results. Factors such as market conditions, economic factors, interest rate changes, and portfolio adjustments may impact future performance. All investments are subject to market risk, including the potential loss of principal.

An issuer of a security may be unwilling or unable to pay income on a security. Common stocks do not assure dividend payments and are paid only when declared by an issuer’s board of directors. The amount of any dividend may vary over time.

Investments are subject to market risk, including the potential loss of principal. Diversification does not ensure a profit or protect against a loss in declining markets. Clients should carefully consider their investment objectives, risk tolerance, and financial situation before making any investment decisions.

The “S&P 500” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Bahl & Gaynor. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Bahl & Gaynor.

London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2025. FTSE Russell is a trading name of certain of the LSE Group companies. “FTSE®” “Russell®”, “FTSE Russell®”, “FTSE4Good®”, “ICB®”, “Mergent®, The Yield Book®,” are trademarks of the relevant LSE Group companies and are used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

Alpha is a measure of risk-adjusted return expected from a portfolio above the benchmark return at any point in time. Beta is a concept that measures the expected move in a portfolio’s rate of return relative to movements in the benchmark. A beta greater than 1.0 suggests the portfolio is more volatile than the benchmark and a beta less than 1.0 indicates lower volatility. Downside Protection ratio measures a portfolio’s performance in down markets relative to the benchmark. A value of less than 100% indicates that an investment has lost less than its benchmark during periods of negative returns for the benchmark. Price Return equals the percent change in the S&P 500 Price Only Index. Dividend Return is equal to the total return minus price return. Total return equals price return plus reinvested dividends during the period. Capital appreciation equals the percent change in the S&P 500 Price Only Index. Small/Mid Dividend Stocks is representative of companies with a dividend yield in the middle 40% of dividend payers with a market capitalization in the bottom 50% of the NYSE (excluding REITs) and includes all NYSE, AMEX, and NASDAQ stocks that meet these criterion. Small Stocks is representative of US public equity securities with a market capitalization in the bottom 30% (excluding REITs) of the NYSE and includes all NYSE, AMEX, and NASDAQ stock that fit the market cap criteria. Total Equity Market is representative of US public equity securities listed on the NYSE, AMEX or NASDAQ exchange. Large Capitalization Equities refers to publicly traded companies with a market capitalization of at least $10 billion. Small/Mid (smid) Capitalization Equities refers to publicly traded companies with a market capitalization between $2 billion and $10 billion. Small Capitalization Equities refers to publicly traded companies with a market capitalization below $2 billion.