Predictions, Patience and People – 2025 Annual Letter

February 2025

Dear clients and friends,

It’s that time of year again when Wall Street firms feel compelled to produce forecasts for market returns. Despite numerous academic studies confirming the inaccuracy of these predictions, the tradition continues. As John Kenneth Galbraith famously said, “The only function of economic forecasting is to make astrology look respectable.” Yet, the forecasts keep coming. You might think that after being wrong repeatedly, the experts would admit their shortcomings and stop. But no.

Why do they persist? First, no one really keeps score, and there are no consequences for being wrong. When was the last time you heard of a Wall Street analyst being fired for an incorrect forecast? Probably never. Second, it’s our own fault! Human nature craves the illusion of certainty and the belief that an expert with a crystal ball is guiding their investment portfolio.

Perhaps they have stopped trying and just haven’t admitted it publicly? Goldman Sachs, Morgan Stanley, and J.P. Morgan all predicted that the S&P 500 Index would end the year at precisely 6,500. It’s almost as if they said, “Why not pick a decent return number that will make our clients happy, say 10% or so, and then let’s find the nearest round number.” Voila…6,500!

A few months earlier, Goldman Sachs, in a well-reasoned research piece, suggested that given strong equity performance over the last decade (13% annualized) and the current high valuations, the range of annualized equity market returns over the next decade should be between -1% and 7%, with a median estimate of 3% (or 1% on a real basis). This type of rational, well-researched view that provides a wider and less certain (and lower) range of long-term performance expectations, rather than the typical short-term predictions, can be helpful for investors tilting and rebalancing their portfolios.

One of the largest misconceptions about investing is that one must be able to predict the future. Quite the opposite is true. Recognizing and accepting that uncertainty and volatility are inherent in successful long-term investing should be liberating. Numerous studies highlight that investor returns are far worse than investment returns. Aggregated mutual fund returns are higher than aggregated investor returns. How can that be? Investors tend to want control and their natural instinct is to trade markets…chasing returns when they have been good – typically missing much of the upside – and selling when things are bad – thereby locking in losses. We often lack the patience to allow the long term to play out. This is one reason that private investments can be so powerful for investors. Not only can we typically capture higher returns present in many portions of the private markets, but we as investors are saved from ourselves and prohibited from tinkering.

While we can agree with the report mentioned above that equity market returns over the next decade may be underwhelming by historical standards, this does not necessarily mean they will perform poorly in the coming year. A similar report last year also predicted muted long-term returns based on then current valuations, and yet the S&P 500 produced a 27% return in 2024. According to J.P. Morgan, the S&P 500 registered two 20%+ years in a row just ten times since 1871 and only during the 1990’s bull market and the Roaring Twenties did the markets continue their strong returns. Will the market correct in 2025? The honest answer is that no one knows. While valuation has been a strong contributor to long-term performance expectations, it is no better than the forecasters in predicting short-term returns.

In addition to enjoying strong equity market returns, we have also witnessed an extraordinary market structure in which a few large companies have driven the majority of S&P 500 returns, which is a capitalization-weighted index that heavily weights stocks such as Apple, Microsoft, and Amazon. What many fail to realize is that, despite what we have seen in recent years, cap-weighted indices tend to underperform most other methods of index construction over the long term, and the reason is quite simple. In a cap-weighted index, overvalued stocks will be overweighted compared to their intrinsic value and undervalued stocks will be underweighted. Will this market dynamic correct in 2025? The honest answer once again is that no one knows. Although, it is interesting to note that the Goldman Sachs research paper cited above suggests that an equal-weighted S&P 500 index is likely to outperform the cap-weighted index over the next decade by an annualized 2% to 8%!

Long-term investors who are patient and recognize that these market dynamics may not correct over the next year are likely to prudently rebalance (i.e., not trade or attempt to market time) their portfolios away from these appreciated and arguably overvalued areas of the capital markets.

Shifting to the business side of things, Gresham continues to be healthy, reaching an all-time high in client assets as we enter our 28th year. Strong public and private market performance over the last decade have certainly contributed to this, but our clients’ continuing confidence is the bedrock of our success and for which we are extremely grateful. Importantly, this steady growth has allowed us to continue to invest in our business, becoming deeper and more capable in many ways, the most important of which is our people.

While businesses have a variety of different assets, ours consists primarily of people. Our team is the engine of our business. They provide the ideas, the execution, and the energy to perform for our clients. We are gratified to once again be voted among the top places to work in Chicago by a Crain’s Magazine survey of employees, but this is merely a milestone on a never-ending journey. The competition to attract, retain, and develop our professionals has never been fiercer. We continually push ourselves to improve our hiring practices and enhance our development programs. We know our competition won’t stop and neither will we.

From all of us at Gresham, thank you for your continued support.

Edward F. Neild IV

Chief Executive and Chief Investment Officer