Performance Review
Major US indexes reached new record highs during the second quarter of 2024. While the Dow Jones Industrial Average (DJIA) ended the period with losses, fervor for artificial intelligence (‘AI’) lifted the Standard & Poor’s 500 Index (SP500, SPX) and NASDAQ Composite Index (COMP:IND) to solid quarterly gains. The US Federal Reserve (Fed) kept the federal funds target rate unchanged at a 23-year high at its May and June meetings, reducing its projected number of rate cuts for 2024 from three to one. Large-capitalization stocks collectively generated gains, while small- and mid-cap stocks generally declined, with growth faring better than value in all three market-cap tiers.
Quarterly Key Performance Drivers
Stocks |
Sectors |
|
HELPED |
Monolithic Power Systems, Inc. |
Energy (Lack of Exposure) |
Eli Lilly and Company |
Consumer Discretionary (Stock Selection, Underweight) |
|
Amphenol Corporation Class A |
Financials (Underweight) |
|
HURT |
Apple Inc. |
Industrials (Overweight) |
Sartorius AG Pref |
Information Technology (Stock Selection) |
|
Monster Beverage Corporation |
Consumer Staples (Stock Selection) |
The fund’s returns were positive for the quarter but lagged its S&P 500 Index benchmark. In the information technology (‘IT’) sector, our underweight position in Apple (AAPL) hindered relative performance. The technology giant reported solid fiscal second-quarter 2024 financial results helped by particularly strong growth in its services business. Investor expectations have risen in anticipation of the company’s artificial intelligence (‘AI’) initiatives. In contrast, Monolithic Power Systems (MPWR) was a top IT sector contributor. The power controller specialist leads in power chip design, with a strong focus on data center applications. AI server growth has been a driver of performance for the company. Sartorius (OTCPK:SARTF) was a top detractor in the health care sector. The international pharmaceutical and laboratory equipment supplier issued disappointing first-quarter 2024 financial results, which have been impacted by weakness in China and lower investment in higher-priced equipment.
Stocks |
Sectors |
|
HELPED |
ServiceNow, Inc. |
Information Technology (Overweight) |
Intuit Inc. |
Financials (Underweight) |
|
Autodesk, Inc. |
Energy (Lack of Exposure) |
|
HURT |
Apple Inc. |
Industrials (Overweight) |
NIKE, Inc. Class B |
Consumer Discretionary (Stock Selection) |
|
NextEra Energy, Inc. |
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The fund outperformed its benchmark in June. In the IT sector, ServiceNow (NOW) contributed most to relative returns. The cloud-computing platform has been leveraging AI into its workflow automation software to improve how a company predicts workflows, saving time and money. Following a brief setback of its stock in May, Intuit (INTU) climbed higher in June as AI continues to help drive revenue growth for the financial management software provider. We believe the long-term secular shift toward doing taxes online and price increases on its popular tax software are tailwinds for the company. In contrast, athletic apparel and footwear company Nike (NKE) was a leading detractor in the consumer discretionary sector. Sluggish sales of its core brands weighed on its fiscal fourth-quarter 2024 financial results, pressuring its stock. We acknowledge the company’s strong brand equity advantage and will be monitoring management’s ability to improve innovation and distribution.
Outlook & Strategy
During the quarter, there were indications that US inflation was moderating, though it continued to exceed the Fed’s target. Our outlook on the US stock market is broadly optimistic, and we anticipate a slow decline in inflation rates, potentially leading to rate cuts later in the year. We believe Franklin Growth Fund can perform well in different market situations by investing in some appealing secular trends. For instance, we are optimistic about AI, which can help businesses be more productive, cost-effective and efficient. We see promising inventions in medical technology, such as surgical robots and bioprocessing systems. We also see high growth potential in companies that are advancing energy transition and digital transformation.
We invest in quality businesses that we believe can expand over long periods of time. These businesses, in our view, can adjust to various economic situations and have an edge over their competitors. We employ active management and a rigorous selection process to identify what we believe to be superior companies that can potentially benefit from the upside of a market cycle while managing downside risk. Currently, our largest sector exposure is in IT, where we favor software and semiconductor companies, especially those driving the future of AI. We are also overweight relative to the benchmark in the health care and industrials sectors, where we are finding opportunities in the life sciences tools and professional services industries, respectively.
Fund Details
Fund Description The fund seeks long-term capital appreciation by investing substantially in the equity securities of companies that are leaders in their industries, and which the managers believe are suitable for a buy-and-hold strategy. Performance Dataa: Average Annual Total Returns 1(%) at NAV
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