MFS® Growth Strategy - Quarterly Portfolio Update

MFS Growth Strategy-Quarterly Portfolio Update

Hello, and thank you for tuning in to the MFS^® third quarter 2024 growth equity review. My name is Laura Granger and I am the institutional portfolio manager on the US Growth team. 

I will spend the next five minutes discussing with you recent market trends, give you an update on index concentration, including the Magnificent 7, and then pivot to a review of our outlook. 

So, following a robust first half performance, the Russell 1000^® Growth index gained about 3% in the quarter, pushing the year-to-date return to 24.6%. This return ranks as the sixth best 9-month return since 1990. It’s even more remarkable when you consider that it’s following a 42% gain that we had in 2023. Growth stocks have posted very strong absolute returns over the last 15 months. However, the third quarter was volatile, with sharp moves in both directions in reaction to macro events. 

So here’s what happened in the quarter. The quarter started out strong with better than expected earnings reports and upward revisions for many companies. But then mid-quarter, we experienced a sharp selloff in reaction to the unwinding of the yen carry trade. Stocks that had performed the best year to date were hit the hardest, most notably in the technology sector. Semiconductor and semi-cap equipment names were especially weak due to the growing uncertainty over the current pace of AI investment, questions about the path to monetization for AI investments, the harsh crackdown on China and also Intel’s cut in capex guidance. It wasn’t really surprising to see some profit taking in many of the AI-related names as the stocks have outperformed and valuations became a bit rich. But it is important to note the long-term earnings outlook for these companies remains intact. 

Then the market rebounded late in the quarter in reaction to a 50-basis point cut in fed funds rate. What is most notable about the quarter though, is that the returns broadened to multiple sectors and industries. 

So this first chart looks at the performance of the Russell 1000^® Growth index versus the Mag 7.  And as you can see, the Mag 7 dominated returns in 2023, and the first half of this year. But shift your focus to the third set of data bars. In the third quarter, the broader market outperformed, with the Russell 1000^® Growth index ex these seven stocks gaining 5%, while the Mag 7 as a group gained only 2%. So the dominance of the Mag 7 stocks is waning.  

This next chart illustrates why mega-cap technology dominated index returns for so long. It was due to their outsized earnings growth, which you can see on this chart with the gray bars. However, the gap in earnings growth between these stocks and the rest of the index is becoming more narrow. Growth for the six largest tech names is expected to decelerate, while growth for the rest of the index, represented by the blue bars, is improving. So, investing in growth is so much more than the mega-cap technology or the Mag 7, and active management gives you a broader exposure to the rest of the market.  

There was also a notable rotation in market leadership during the quarter as the Russell 1000^® value index outpaced the growth, gaining 8.9%. Sectors that are considered bond proxies that are more heavily weighted in the value index, such as utilities, real estate and financials, outperformed in reaction to the interest rate cut. However, it’s important to note that all sectors did post gains for the quarter.  

So index concentration still presents absolute risk in the Russell 1000^® Growth index.  The Mag 7 now comprise about 54% of the index. And as you can see in this next chart, these names are not created equal. They differ from an earnings and valuation perspective. Let’s take, for example, Meta Platforms. Earnings continue to be revised higher, yet the stock trades at a below market multiple of 24x next 12 months earnings. Contrast this with Tesla, where earnings estimates are in decline and the PE multiple has expanded to 89x next 12 months earnings. Lofty valuations without  the support of real earnings is not sustainable in our view. And while short-term performance can be heavily impacted by sentiment, eventually earnings drive stock price returns. And it’s really important to be cognizant of these differences and actively manage around these large index weights rather than blindly buy the index. Active management is important in this asset class.   

So now regarding our outlook, market returns are broadening and the outlook for earnings across multiple sectors remains positive. While we face multiple macro risks in the coming quarters, including the US election, geopolitical unrest, weakening economic data, dispersion of returns continue to increase and the market is differentiating stock price performance based on earnings. It is our job to look through the short-term volatility and focus on long-term earnings growth. In the long run, earnings drive the bulk of stock price performance, and this is great for active managers. 

So our portfolio positioning is determined by our bottom-up stock selection, focusing on companies that have the ability to generate above average rate and duration of growth. Our bottom-up research has led us to identify multiple trends that are driving long-term earnings growth. These include things like AI, the data center build out, power management and electrification, onshoring, derisking of supply chains, aerospace, infrastructure spending, new product innovation in health care and alternative asset managers — just to name a few. The portfolio is invested in companies benefiting from these long duration trends, driving durable revenue and earnings growth.

So thank you for taking the time to listen to our third quarter review. If you have any questions, please reach out to your MFS Representative and have a great day.

 

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The views expressed are those of the speaker and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor. No forecasts can be guaranteed. Past performance is no guarantee of future results.

Important Risk Considerations:
The strategy may not achieve its objective and/or you could lose money on your investment.

Stock: Stock markets and investments in individual stocks are volatile and can decline significantly in response to or investor perception of, issuer, market, economic, industry, political, regulatory, geopolitical, environmental, public health, and other conditions.

Growth: Investments in growth companies can be more sensitive to the company's earnings and more volatile than the stock market in general.

Please see the applicable prospectus for further information on these and other risk considerations.

The portfolio is actively managed, and current holdings may be different.

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