Where to look: Uncovering growth in the 2025 market

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With US stocks maintaining momentum, Jonathan Curtis of Franklin Templeton knows where the real growth stories are waiting, with meaningful return potential in a competitive market

OVER THE past two years, US stocks have delivered remarkable returns for investors. While the substantial gains and widening market participation indicate that much of the positive news has already been factored into the valuations of many stocks, as we step into 2025, there are still meaningful growth opportunities to be found within select companies – if you know where to look, says Jonathan Curtis, chief investment officer (CIO) of the Franklin Equity Group - a specialist investment manager of Franklin Templeton. This optimistic outlook is further bolstered by the decisive election outcome, which swiftly removed a significant source of market uncertainty and triggered a rally that may extend into early 2025. Anticipated tax cuts and deregulation across key industries, particularly in financial services and technology, have rekindled the “animal spirits” of capital markets. In this energized landscape, IPOs, mergers, and acquisitions are expected to return in force. While the effects of policies related to tariffs and immigration remain less certain, the US economy is in a strong position – poised to outperform global counterparts like China and Europe – and history suggests markets tend to thrive during the first year of a presidential term. Curtis’s perspective on these market developments is shaped by his professional experience, which began at Nortel, a name that echoes through Canadian telecom history. Surrounded by brilliant engineers, Curtis learned to navigate complex systems while contributing to advancements in telecommunications. But Silicon Valley beckoned, leading Curtis to leave behind his “Big Nerd Ranch” and dive headfirst into the tech-driven world of the Bay Area. What followed was a transformative pivot. Realizing he was “only an average engineer,” Curtis pursued an MBA at Berkeley. There, he discovered his passion for understanding businesses as systems – complex entities that, like machines, could be decoded, optimized, and driven to outperform. He found great success applying this strategy to his work, and his optimistic yet tempered outlook is reflected in the way his team is tackling 2025: maintaining a constructive, risk-on investment approach. Now, Curtis leads the Franklin Equity Group, which manages more than US$100 billion in assets, with a strong focus on digital transformation, healthcare innovation, and energy infrastructure.

Franklin Resources, Inc. [NYSE:BEN] is a global investment management organization with subsidiaries operating as Franklin Templeton and serving clients in over 150 countries. In Canada, the company’s subsidiary is Franklin Templeton Investments Corp., which operates as Franklin Templeton Canada. Franklin Templeton’s mission is to help clients achieve better outcomes through investment management expertise, wealth management, and technology solutions. Through its specialist investment managers, the company offers specialization on a global scale, bringing extensive capabilities in fixed income, equity, alternatives, and multi-asset solutions. With more than 1,300 investment professionals and offices in major financial markets around the world, the California-based company has over 75 years of investment experience and approximately US$1.6 trillion (approximately CAN$2.2 trillion) in assets under management as of January 31, 2024.

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us gross product (GDP) contributors

2021 Q1

“The US economy is one of the strongest in the world right now. The US consumer, who drives 70 percent of the economy, is employed, and if they’re employed, they’ll keep spending. That’s a major growth driver”

Jonathan Curtis, Franklin Templeton

For Franklin Equity Group, this economic strength is complemented by its 75-year history of long-term, active investing. Curtis highlighted the group’s expertise in identifying high-quality businesses with substantial growth potential, all while maintaining discipline on valuation. “Ninety percent of our assets are focused on growth and innovation,” he says. “This is where we excel. Being based in Silicon Valley gives us a huge advantage – we’re 15 minutes away from some of the world’s most innovative companies, whether they’re public or private. Most of our peers don’t invest in private companies, but we do, giving us early insights into disruption before others catch on.” The Franklin Innovation Strategy, based on the group’s

Dynatech Strategy, is one of the oldest science and technology funds globally. Dating back to 1968, this strategy reflects Franklin Equity Group's decades of expertise in investing in innovation.

Reflecting on 2024, Curtis paints a dynamic picture of the US market, characterized by three distinct phases. The year began with concentrated gains among the Magnificent Seven companies – tech giants riding the wave of artificial intelligence innovation. However, signs of softening economic activity and a decline in inflation allowed the Federal Reserve to signal a potential pivot. This pivot meant that the cost of capital would likely decrease, encouraging investors to take on more risk. The result? A broadening of market participation. “Investors still held onto the Mag Seven, but they moved a bit on the margins into more of the market,” Curtis explains. “Midway through the year, we saw only 44 names contributing to S&P 500 returns, but by the end of 2024 that number had risen to 67." The broadening of returns was a welcome development, signaling reduced market concentration.

The 2024 elections delivered an unexpected red sweep, creating scenarios that caught many investors off guard. While the outcome initially brought optimism – fueled by expectations of reduced regulations and a more business-friendly environment – it also introduced new uncertainties. Certain sectors thrived. Financial services and technology benefited from the anticipated pro-growth environment, while healthcare faced challenges due to concerns about cabinet appointments. But Curtis stresses that the implications of the election are still unfolding. Adding to the complexity, Federal Reserve Chair Jerome Powell tempered optimism with a cautious tone in December. “He confirmed that the US economy is in a ‘very, very good spot,’ with employment trends strong and supply chains clearing,” Curtis recounts. However, the Fed reduced its forecast for rate cuts in 2025 from four to two, effectively signaling a form of tightening. Markets quickly repriced risk, leading to significant volatility. Despite these shifts, Curtis emphasizes the strength of the US economy and its potential for growth heading into 2025. He remains optimistic about US equities. “We’re seeing profound productivity gains,” he notes, citing examples from Google and JP Morgan that highlight the transformative impact of AI on business operations.

As markets enter what Curtis describes as the beginning of a new business cycle, he emphasizes the importance of looking beyond large-cap stocks. While large-cap companies often provide safety through strong balance sheets and structural advantages, Curtis urges investors to consider the opportunities available down the market-cap spectrum. “This lighter touch on the regulatory front will unlock greater animal spirits,” Curtis explains. “We’re going to see M&A activity picking up, capital markets reopening, and small- to mid-cap companies benefiting from these trends.” Valuations, too, are compelling in this segment. While the market-cap-weighted S&P 500 trades at about 25 times

Strong economic foundation

Looking back on 2024

Published January 29, 2025

“This lighter touch on the regulatory front will unlock greater animal spirits. We’re going to see M&A activity picking up, capital markets reopening, and small- to mid-cap companies benefiting from these trends”

Jonathan Curtis, Franklin Templeton

2021 Q2

2021 Q3

2021 Q4

2022 Q1

2022 Q2

2022 Q3

2022 Q4

2023 Q1

2023 Q2

2023 Q3

2023 Q4

2024 Q1

2024 Q4

2024 Q3

-0

-4

-2

Consumption

Investment

Government

Inventories

Net Trade

GDP

6 months, January–June 2024

Number of stocks contributing to S&P 500 returns

Index Return - 44 names

S&P 500: 1H2024

99.83%

CY2024

99.89%

Index Return - 67 names

12 months, January–December 2024

“The US economy is one of the strongest in the world right now,” Curtis emphasizes. “The US consumer, who drives 70 percent of the economy, is employed, and if they’re employed, they’ll keep spending. That’s a major driver of growth.”

The surprise "red sweep"

Active management: a tool against volatility

Curtis identified four key themes that form the backbone of Franklin Equity Group’s investment strategy: 1. Digital transformation The global economy is still in the early stages of leveraging software, data, and technology to reshape industries. Curtis sees enormous potential in areas like cloud computing, artificial intelligence, cybersecurity, and the Internet of Things (IoT). “Cloud computing alone represents structural growth,” he says. “We’re still moving enterprise workloads onto more efficient, scalable platforms. Companies like Microsoft, Google, Amazon, and smaller innovators like MongoDB and Snowflake are well-positioned to capitalize on this trend.” Artificial intelligence, a subset of this theme, is undergoing a critical transition. While the build and experimentation phase drove early growth, Curtis believes the application phase – where AI is integrated into business processes – will unlock even greater returns. “Companies like Walmart and JP Morgan are seeing significant productivity gains from AI,” Curtis notes. “Investors are underestimating the operational efficiencies and revenue opportunities this phase will bring.” 2. Healthcare innovation Advancements in healthcare are another transformative force. From breakthroughs in genomics and AI-driven drug discovery to the rising popularity of GLP-1 drugs addressing obesity, the sector is poised for long-term growth. “These drugs could profoundly bend the cost curve in US healthcare,” Curtis explains. “Combine that with innovations for an aging population and advancements in data-driven healthcare, and the opportunities are immense.” 3. Energy infrastructure and sustainability The demand for energy continues to accelerate, driven by AI, electric vehicles (EVs), and broader industrial needs. Curtis emphasizes the importance of investing in sustainable energy solutions while addressing immediate challenges. “We estimate that the US grid has about 38 gigawatts of remaining unused power,” he said. “At the current consumption rate, we’ll need new sources of energy within a few years. This includes renewables like solar, as well as a re-evaluation of nuclear energy and other options.” Curtis is also bullish on the long-term prospects of EVs, despite skepticism around adoption rates and infrastructure challenges. “EVs offer a better user experience,” he said. “The structural demand for this transition is undeniable, and global players like Chinese automakers are pushing aggressively into this space.” 4. Industrial innovation and onshoring Rising tariffs and shifting trade dynamics are compelling US companies to reinvest in domestic manufacturing and infrastructure. This trend, coupled with advancements in automation and industrial technology, is creating new investment opportunities. “Onshoring isn’t just a response to policy – it’s about building a more resilient industrial base,” Curtis notes. “This will drive demand for energy, innovation, and growth across multiple sectors.”

Structural growth themes driving the future

earnings, an equal-weighted version – a better reflection of smaller companies – trades at just 21 times earnings. This discrepancy highlights the potential for value-oriented opportunities in less-concentrated areas of the market. Curtis’s advice to investors is clear: diversification and a broader market perspective are crucial, particularly in a time of economic change. “Investors need to avoid overconcentration and take advantage of active management to identify undervalued opportunities across the spectrum,” he said. By embracing diversification and exploring investments beyond traditional large-cap names, investors can position themselves to capitalize on the evolving market landscape. Franklin Templeton’s expertise in active management, particularly within growth and innovation strategies, offers a powerful resource on this broadening horizon. As Curtis concludes, “Volatility creates opportunity, and active management helps you seize it.”

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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. 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 information provided in this material is not intended as a complete analysis of every material fact regarding any country, region, or market. All investment products managed by Franklin Equity Group and distributed by Franklin Templeton Investments Canada may not offer investments in private companies. Please read the prospectus and fund fact/ETF facts document before investing. Commissions, trailing commissions, management fees, brokerage fees, and expenses may be associated with investments in mutual funds and ETFs. Please read the prospectus and fund fact/ETF facts document before investing. Mutual funds and ETFs are not guaranteed. Their values change frequently. Past performance may not be repeated. Franklin Templeton Canada is a business name used by Franklin Templeton Investments Corp.

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As of 31/12/2024 Source: Macrobond, as of 31/12/2024 Source: Bloomberg, as of 31/12/2024

Important Legal Information Disclaimer 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. 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 information provided in this material is not intended as a complete analysis of every material fact regarding any country, region, or market. Commissions, trailing commissions, management fees, brokerage fees, and expenses may be associated with investments in mutual funds and ETFs. Please read the prospectus and fund fact/ETF facts document before investing. Mutual funds and ETFs are not guaranteed. Their values change frequently. Past performance may not be repeated. Franklin Templeton Canada is a business name used by Franklin Templeton Investments Corp.