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CONTRIBUTORS

Mike McCarthy

Chief Investment Officer,
Portfolio Manager,
Franklin Equity Group

JP Scandalios, CFA

Portfolio Manager,
Franklin Equity Group

Preview

Historically, small- and mid-cap growth companies in the United States have demonstrated notable outperformance relative to their large-cap peers in periods following bear markets.1 Understandably, these bear markets tend to reflect periods of broader market concerns, and investors generally favor less economically sensitive stocks in anticipation of recessions. These dynamics appear at play today, as markets grapple with mixed economic data, rising rates and uncertainty over whether the Federal Reserve (Fed) can navigate a soft-landing and avoid recession. Over the pullback period from November 1, 2021, through September 30, 2022, the S&P MidCap 400 Growth and S&P SmallCap 600 Growth Indexes posted declines of -25.18% and -24.28%, respectively.2 Year-to-date through June 30, 2023, these indexes have only just started to show positive returns (+10.44% and +7.02%, respectively, primarily due to market appreciation in the month of June), while the large cap S&P 500 Growth Index was up over 21% during the same period.3 In our opinion, overdone selling of small- and mid-cap growth stocks may provide an attractive opportunity for long-term investors today, as otherwise high-quality small- and mid-cap growth stocks are trading at what we believe to be depressed valuations despite demonstrating positive and improving fundamentals.

Small- and mid-cap growth companies can benefit from valuation re-ratings well into recoveries. When the market begins to discount a recovery, capital often returns to small- and mid-cap growth companies, as investors hope to benefit from the sensitivity of their improving earnings streams. Additionally, the cost rationalization that often occurs during times of downward volatility and recessions may produce efficiency gains for small- and mid-cap companies in the ensuing recovery period, as they often right-size their operations during periods of weakness.

  1. Source: Morningstar.
  2. Source: Ibid. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or guarantee of future results. See www.franklintempletondatasources.com for additional data provider information.
  3. Source: Ibid. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or guarantee of future results. See www.franklintempletondatasources.com for additional data provider information.

 

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Equity securities are subject to price fluctuation and possible loss of principal.

Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.

The investment style may become out of favor, which may have a negative impact on performance.

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data.  Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

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