MFS® Growth Strategy - Quarterly Portfolio Update

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

I will spend the next few minutes discussing a market review and comment on our 2026 outlook and where we are finding new opportunities.

So the fourth quarter capped the third year in a row of double-digit gains for the Russell 1000® Growth Index. The index gained about 1% for the quarter and 18.5% for the year. While growth stocks outperformed this year, value significantly outperformed growth in the quarter gaining about 3.8%. In general, robust earnings growth and upward earnings revisions across multiple sectors continued to drive stock prices higher.

However, there is more going on underneath the hood of the headline index returns.

First, there were the volatile and dominating factor influences. 2025 was a tale of two halves, which you can see in this first chart, which measures performance of the index quality quintiles.

The first half of the year factor influences were benign, and the market reacted to fundamentals. Sentiment abruptly shifted after “Liberation Day,” fueling a high beta, risk on rally. Low quality, high beta and companies with negative earnings outperformed in the second half, which was a headwind for the portfolio.

Second, steady compounders, or companies with steady, predictable growth rates, underperformed this year by a wide margin, as you can see on the top two charts on this next slide. Given our focus on high quality, long duration growth, this was a headwind for the portfolio. As you can see on the bottom chart: steady compounders tend to outperform over the long term.

And third, the large-index weights continue to have an outsized impact on overall index returns, despite evidence of a broadening market, which you can see in this chart with the light blue bars. The dark blue bars represent the return of the top eight index weights, the gray bars represent the index. The weight of those names and the contribution to index return data are displayed in the rows underneath the bars.

The top index weights, which include Nvidia, Apple, Microsoft, Alphabet, Broadcom, Amazon, Tesla and Meta comprise 57% of the index and drove 69% of the return in 2025. In fact, four names, Nvidia, Microsoft, Alphabet and Broadcom, which comprise only 40% of the index, accounted for almost 62% of the return.

But grouping these stocks together is a dangerous exercise because they are all so different, and we also saw some pretty significant fundamental shifts in the second half of the year that drove even greater dispersion in performance amongst these names.

For example, in the fourth quarter, Alphabet drove 138% of the index return. The index ex Alphabet declined 36 basis points. And the fundamentals for Alphabet abruptly shifted after the favorable DOJ ruling in September and the release of Gemini 3 in October, which leapfrogged OpenAI’s Chat GPT in performance. Alphabet moved from a presumed loser in the AI race to the leader in a short period of time and significantly outperformed the group.

So, this next slide has a lot of data on it, but it is a great illustration of how different each of the top weights performed, highlighting areas where active managers can add value. In the first column, you can see the large dispersion in returns among the top weights for the quarter. Excitement over Alphabet’s TPUs used to power Gemini 3 helped drive Broadcom’s stock higher because they design the chips. Apple was up on rumors they would use Gemini 3 to power the next version of Siri. Contrast this with Meta, which was down on concerns over growing capex and debt issuance or Tesla which trades at an outrageous 208x 2026 earnings. The second column displays year-to-date returns, only three out of the eight names outperformed the headline index return: Alphabet, Broadcom and Nvidia. So fundamentals are shifting rapidly with new product innovation which will allow active managers to add value in each name. I would also note that Russell reduced the weight of a few of these names as part of the quarterly index compliance capping.

As a reminder, a passive allocation in this asset class has worked over the past 3–5 years because the earnings growth of this cohort of stocks was so outsized relative to the rest of the index and the returns were highly correlated. The contribution to index returns was outsized. Looking ahead, the growth rates are diverging, the spread versus the rest of the index is diminishing, and at the same time, earnings growth is accelerating in other parts of the market, so we would expect to see continued dispersion.

Shifting to our 2026 outlook — earnings growth remains strong and estimates continue to be revised higher. The market has been hyper-focused on AI, and there are a few things that we are watching. The most important will be the continued adoption of AI in the enterprise across sectors, where we are seeing AI solutions accelerating revenues and cutting costs across a variety of businesses. We are also watching the competitive landscape for models as there will be new releases in 2026. Evidence of monetization through subscriptions and advertising will also be important to note.

Outside of AI, we are finding idiosyncratic, long-duration growth ideas with improving fundamentals across multiple sectors including consumer, industrial, financials and healthcare. While the market aggregate valuations are not cheap, there is wide dispersion among stocks and we remain positive given fundamentals continue to be strong with the expectation of earnings growth coming through. We have faced short term periods of factor headwinds before, but earnings drive long term stock price performance. When you disaggregate the returns of any index, earnings explain over 90% of stock price returns in the long term.

Thanks for taking the time to listen to our fourth-quarter update. For more details, 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.

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