In 2025, Lyrical Asset Management's composite delivered robust returns, matching the S&P 500's impressive 17.9% net gain, a notable feat considering its strategic exclusion of the dominant 'Magnificent Seven' technology giants. This performance stands in stark contrast to the broader market, where a significant majority of S&P 500 companies lagged behind, underscoring the disproportionate influence of a few mega-cap stocks. The firm's analysis highlights a crucial divergence: while the cap-weighted S&P 500 has seen its valuation soar, this has been primarily due to multiple expansion rather than superior earnings growth, creating a substantial valuation premium relative to both its historical averages and the equal-weighted S&P 500. This trend, which has seen the cap-weighted index dramatically outpace its equal-weighted counterpart over the past three years, prompts critical questions about its long-term sustainability, as historical patterns suggest such periods of concentrated outperformance often lead to subsequent underperformance.
The current market landscape, characterized by an unusually wide valuation spread, presents both challenges and opportunities. Lyrical's portfolio, despite its value-oriented approach, boasts an impressive earnings per share (EPS) growth history of 10.6%, significantly surpassing the S&P 500's 6.6%. Yet, its forward earnings are valued at a mere 12.5 times, a striking discount compared to the S&P 500's 22.2 times. This unique combination of faster growth and lower valuation underpins Lyrical's confidence in its future performance, as it anticipates a narrowing of this valuation gap if its companies continue to deliver strong earnings. Furthermore, Lyrical's ability to keep pace with the S&P 500 in 2025 was partly due to its holdings in attractively valued companies benefiting from AI technology spending, such as NRG Energy, Johnson Controls, FLEX, and United Rentals, which were acquired at significant discounts.
Looking ahead, Lyrical maintains that the long-term success of investments is fundamentally tied to earnings. Despite instances in 2025 where companies with strong earnings saw their stock multiples compress, the firm believes that consistent earnings growth will ultimately be reflected in stock prices. The unprecedented valuation gap between the firm's portfolio and the S&P 500, coupled with its superior earnings growth, suggests a favorable environment for value investing. Lyrical's strategy is built on the conviction that if its portfolio companies continue to grow earnings at an accelerated pace, their market valuations will inevitably adjust upwards, leading to outperformance.
In a world where market dynamics are often influenced by short-term trends and speculative fervor, Lyrical Asset Management's steadfast commitment to fundamental value investing serves as a beacon of rationality. Their approach demonstrates that genuine and sustainable success in financial markets is not merely about chasing the latest fads, but about diligently identifying and investing in businesses with intrinsic value, strong earnings growth, and reasonable valuations. This philosophy not only fosters long-term financial prosperity but also encourages a disciplined and patient mindset, reminding us that true wealth is built on solid foundations, not fleeting enthusiasms. It exemplifies the enduring principle that hard work, strategic foresight, and an unwavering belief in the power of fundamentals ultimately pave the way for superior and resilient outcomes.