MFS® Growth Strategy - Quarterly Portfolio Update

Hello, and thank you for tuning in to the MFS Second Quarter 2025 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 few minutes discussing what happened in the second quarter, the recent Russell 1000^® Growth index rebalance, index concentration and our thoughts on why the Mag 7 framework is backward looking and should change. I will end with a few comments on our outlook.

The second quarter delivered one of the most dramatic reversals on record.

We started the quarter with a lot of uncertainty, in middle of a deep drawdown that was exacerbated by the Liberation Day tariff announcements on April 2^nd. The index sold off 23% from its February 18^th peak. The trend reversed sharply when President Trump announced a 90-day tariff pause on April 9^th. Market sentiment shifted abruptly as confidence in tariff resolution gained momentum. More importantly, the first quarter earnings reports came in much stronger than expected. During the quarter, 78% of S&P 500 companies beat expectations and earnings were revised higher. Stable economic data and cooling inflation also helped. The Russell catapulted 33% off its low to new index highs, ending the quarter up 18.4% and the year up 6.1%. 

On the surface it may look like breadth declined in the quarter, but market returns were broad based, with every sector except energy gaining.   

But most notable for the Russell 1000^® Growth Index is the growing dispersion in returns amongst the top index weights. The fundamental outlook for these large index weights is diverging and is reflected in stock price performance, which you can see in the first column. While the media still likes to refer to this group of stocks as “the Mag 7,” we believe the Mag 7 framework is very backward looking and reflects only the past high correlation of these stocks. This is changing. AI is proving to be disruptive in all areas of the economy and has the potential to completely change incumbent business models and leadership positions. There will be clear winners and clear losers, and it’s being reflected in stock price performance. Take META as an example. The company is a clear beneficiary of AI generating higher return on investment in the ad stack and e-commerce. It was up 26%. Contrast this with Alphabet, where search is still 90% of earnings and at risk of disruption by AI-generated search. The stock was down 7%. Even further contrast is Apple, which declined 18% in the quarter due to slowing growth, valuation and lack of AI innovation.    

As we have shown you in the past, the last few years’, performance of these stocks was highly correlated because their EPS growth was so outsized relative to the rest of the market, as you can see with the dark blue bars on this chart. However, looking forward, the growth rate as a group is decelerating as leadership positions are threatened for some. More importantly, growth for the rest of the index, the light blue bars, is accelerating as new leaders emerge. The broader market is expected to show stronger growth in 2026.  

This chart is looking at the returns of the mega-cap stocks, the dark blue bars versus the rest of the index. Looking at the second quarter returns it appears on the surface that market breadth declined, but the light blue bars show strong returns for the rest of the index. Year to date, the broader market is outperforming.   

The over emphasis on this group of stocks masks the strength of the broader market. There are multiple examples of other stocks that outperformed the top index weights, including GE Vernova, which gained 73% in the quarter, Amphenol up 51%, Howmet Aeropsace up 43.5%, Netflix up 43.5% and Spotify up 39.5%. There is so much more going on in the market outside these large index weights, creating opportunities for active managers to add value.    

Let’s shift to the Russell Index Rebalance.

Russell rebalances the indices from a style and market cap perspective each June. The rebalance occurred on June 27^th, effective market open June 30^th. Starting in 2026, Russell will move to a twice a year rebalance: June, for style and market cap and November for market cap only.  

Changes to the Russell 1000^® Growth centered around the large index weights. Microsoft, Nvidia and Apple increased in weight. Amazon and Alphabet declined while Meta remained the same. All three moved partially to the large-cap value index. While Tesla is on this chart, it is no longer a top seven index weight and has been displaced by Broadcom, which is now 4.3% of the index, bigger than Alphabet. The top seven weights, ex Tesla and adding Broadcom, are 53.4% of the index as of June 30^th. However, the growth rate for some of the names is decelerating, as we showed you earlier, while improving for others. Changing fundamentals will continue to drive dispersion in returns. You do not want to blindly buy the index with large weights in lagging stocks. There is an opportunity for active managers to add value.

Finally, a few thoughts on our outlook. Persistent macro uncertainty will continue to cause volatility. The upcoming earnings season should provide more insight into how companies will adjust to tariffs. Valuations are on the high side, but economic data remains strong, inflation is cooling and the outlook for earnings remains positive for many areas of the economy. While there is much more to our growth portfolio than AI, we are very excited about some of the new disruptive technologies that are emerging. Every 10 to 12 years, there seems to be a major technology platform shift and we are just on the cusp of new applications enabled by AI. Emerging AI-first companies have the potential to become major players over the next 5 to 10 years, disrupting the market share of incumbents. We are excited about the potential for new leadership to emerge in multiple sectors after several years of highly correlated returns. 

Thank you for taking the time to listen to our second quarter update. For more details please reach out to your MFS representative and have a great day.

 

 

 

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.

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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.

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