MFS® Growth Strategy - Quarterly Portfolio Update

Hello and thank you for tuning in to the MFS third quarter 2025 growth equity review. My name is Laura Granger, I am the institutional portfolio manager on the MFS US growth team.

I will spend the next few minutes discussing the third quarter market review, give you an update on index concentration, and address a common question we get on AI and our outlook.

Most US equity indices reached all-time highs in the third quarter. The Russell 1000® Growth index gained 10.5% and is up 17.2% for the year, supported by robust earnings growth and upward revisions. The AI theme dominated the market, touching multiple sectors and industries. 

While equity returns are broadening, the return of the Russell 1000® Growth index was dominated by a handful of names this quarter. Apple, Nvidia, Tesla, Broadcom and Alphabet comprise 36.2% of the index but drove 80% of the index return. The top eight index weights0 — adding Microsoft, Meta and Amazon to that group — comprise 58% of the index and drove 85% of the index return. The large index weights continue to mask the broader market strength, as the market ex those top eight names is up 13% year to date. 

Before we dive into detail on the large index weights, it’s important to note the impact of the Russell quarter end capping rebalance. As a reminder, Russell started capping the index weights on a quarterly basis using a 4.5%/45% guideline to ensure the index remains IRS RIC compliant. 

The results of the index capping, which took place on September 19th, are illustrated in this table.   Prior to the index rebalance, the stocks greater than 4.5% added up to 51% of the index. Russell cut the weight of Nvidia, Microsoft, Broadcom and Amazon, to bring the combined weights to 45%.  This exercise will continue quarterly; it does not always consider fundamentals and is one reason why active management in the asset class is important. 

There were a few one-time events that drove short- term outsized gains of the large index weights, and we no longer refer to this group as the “Mag 7.” There are now eight names on this next slide, as Broadcom has grown to be the fourth-largest index weight. Combined, these eight stocks comprise 57.4% of the index. 

You can see the outsized performance in the quarter of Alphabet, Apple and Tesla in the first column. Alphabet reacted to positive news from the DOJ, removing a big uncertainty for one company. Apple gained in part due to the same ruling, which will allow Google to continue to pay Apple to be the search engine on iPhones. Tesla rallied on the news of Elon Musk buying $1 billion of the company stock. These are one-time events, and you can see on the further-to-the-right columns the earnings of these names lag, and valuations are higher. Especially Tesla, where earnings continue to disappoint, and the valuation is excessive at 178x 2026 earnings. This is not sustainable. Changing fundamentals will most likely change market share and leadership positions, and you don’t want to blindly own index weights; active managers can add value.   

 

So as a reminder, passive allocation in this asset class worked over the last three years because the earnings growth of this cohort of stocks was so outsized relative to the rest of the index, which you can see by the dark blue bars on this next chart. As a result, their returns were highly correlated. But looking ahead, the growth rates are decelerating, lessening the growth premium with the rest of the market, and at the same time, earnings growth is accelerating in other parts of the market. And we anticipate a broadening of market returns.

So shifting focus to the most common question we get from clients — are we in an AI bubble that rhymes with 2000? So we can draw some parallels, but there are many differences, and it is difficult to call a top. The primary difference in the large caps names is valuation, and this next slide helps to illustrate the point.

While valuation appears stretched in some areas, like private equity or in names like Palantir and Tesla, it’s not across all stocks. This chart decomposes the returns of Nvidia over the last two years and Cisco leading up to March of 2000 stock market peak. At the height of the tech bubble, Cisco was the market leader and the largest index weight, and as you can see on the chart on the right, Cisco traded at 120x earnings, and most of the stock price appreciation was PE multiple expansion, the dark blue line. When earrings growth decelerated, you got the double negative whammy of PE compression with declining earrings on the downside. Contrast that with one of today’s market leaders, Nvidia, the chart on the left; stock price has appreciated solely due to earrings growth, which is the gray line, and the PE multiple has actually contracted. 

The second difference is the megacap technology names are fundamentally stronger, with free cash flow, healthy balance sheets, and strong profitability. Third, the capital spending of the public companies is primarily being financed through cash flow, not debt. And finally, we are seeing strong demand and usage trends. AI-related capex is inflecting, with the inflection in usage with positive return on investment. The cycle will end at some point, but we believe there is durability. We monitor multiple data points to assess demand drivers and the durability of capex. The biggest risk is if user growth and engagement decelerates and there’s lack of monetization, it will be harder to raise capital and growth will slow. The information is changing rapidly. The megacap names that won in past cycles may or may not be future leaders, and we are constantly evaluating new information to identify the companies we believe will be the leaders in the next five years or longer.

So looking ahead, earnings growth remains strong, and estimates continue to be revised higher. We remain cautiously optimistic, just given valuations are above long-term averages and also because of the ongoing geopolitical risks. While AI chatter dominates the market, we’re finding many exciting opportunities in multiple areas, including industrials, financials, new product innovation in health care, communication services, and technology.

Thanks for taking the time to listen to our third quarter update, and for more detail, please reach out to your MFS representative, and have a great day.

 

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