Unlocking Durable Growth Themes
Jul 21, 2025
Jennison Associates outlines their outlook on the long-term prospects for growth stocks amid the dynamic market environment.
SEIZING OPPORTUNITY AMID MARKET UNCERTAINTY
While the economy and markets have proved to be quite resilient through what has been a very volatile year so far, much uncertainty persists. Significant questions about tariffs, fiscal policy, and global tensions remain unsettled. Tariff rates continue to be negotiated and not altogether smoothly, the future of President Donald Trump’s fiscal plan is still undecided, and while tensions in the Middle East do not appear to be heading for an escalation, they have not been resolved.
We remain concerned that tariffs pose a risk to future revenue and earnings growth broadly. In our view, import levies represent a tax on consumers and businesses that reduces growth and, depending on the level, results in varying degrees of higher prices of goods and services. The ensuing effect on consumer spending and the broader economy continues to be in question.
SECTOR VIEWS
During the quarter, growth outperformed value across small-, mid- and large-cap during the quarter, reversing the trend from 1Q25. Mid-cap growth led market returns for the trailing one year, while large-cap growth is still the strongest performing for three and ten years. Small caps lagged for all longer time periods.
From a sector perspective, energy and defensive sectors health care, consumer staples, and utilities underperformed, reversing the trend from 1Q. Growth sectors – consumer discretionary, information technology, and communication services outperformed.
Given the uncertainty, we tactically reduced risk during the quarter, while simultaneously looking for opportunities to redeploy cash into compelling growth companies. These actions are consistent with our investment strategy and our long-term approach to growth investing.
The second quarter of 2025 marked a remarkable turnaround for the technology sector, defying the headwinds that defined the start of the year. After a bruising Q1, tech stocks experienced a strong rally, propelling the sector to the top of the S&P 500’s performance charts and erasing much of the previous quarter’s losses. This resurgence was driven by renewed optimism as the spectre of tariff delays and supply chain disruptions receded, allowing companies to recalibrate and investors to refocus on fundamentals.
The Magnificent Seven, comprising Apple, Microsoft, Nvidia, Alphabet, Amazon, Meta, and Tesla, regained momentum, with Microsoft and Nvidia notably reaching new all-time highs and collectively achieving a market cap well above previous highs. Their leadership underscored the sector’s renewed vigour, even as Apple lagged amid ongoing market pressures.
Underpinning this revival was the continued ascendancy of artificial intelligence, cloud computing, and advanced semiconductor innovation. Across the industry, enterprises intensified their commitment to digital transformation, with cloud adoption and cybersecurity assuming indispensable roles in modern business strategy.
The S&P Composite 1500 Health Care Index (the Index) declined 6.9% in the second quarter, underperforming the S&P 500, which gained 10.9%. The health care sector has struggled under the weight of persistent challenges—like labour shortages and regulatory uncertainty - compounded this year by major new threats: the sweeping Medicaid cuts proposed in the One Big Beautiful Bill Act (OBBBA) and the potential earnings hit from Most Favored Nation (MFN) drug pricing.
Despite these headwinds, history shows that such periods of deep pessimism and discounted valuations - especially in companies with strong free cash flow - often set the stage for outperformance, making this a unique opportunity to have exposure to innovative health care companies.
For the second quarter of 2025 the S&P 500 Index’s financials sector was up 5.5% (underperforming the S&P 500’s 10.9% return). This was a complete reversal of what we saw in the first quarter where tariff uncertainty was driving the macro and then the defensive positioning that comes with this uncertainty.
Taking the tariff back-and-forth rhetoric out of the equation, we continue to see solid fundamentals across a broad range of business models, along with improving credit conditions. We are also seeing ongoing improvement in inflation expectations as we transition into 2025. Nevertheless, this could all be reversed by a possible recession due to excessive tariffs by the current U.S. administration (albeit the recent news around this has been “less bad” versus what we saw in Q1). There continues to be uncertainty around the future structure of the tariffs, the response from our trading partners, and then the implications around confidence and sentiment for both the consumer and businesses. Complicating this are the additional unknowns around the forward direction of the Fed, inflation and the financial health of the average consumer.
Overall, the large money centre, consumer finance, and superregional banks are significantly better positioned today across a broad range of balance sheet, capital and risk management metrics. Valuations in the sector have normalised. We believe tailwinds for future earnings growth will be primarily driven by solid revenue trends and credit controls; growing net interest margins; ongoing expansion of their fee-based business opportunities; and continued efficiency improvements through better use of technology and AI. We are also seeing opportunities with solid fundamentals and attractive valuations in global alternative asset management firms, P&C insurance companies, and several digital payment and financial technology companies.
During 2Q25, the Alerian Midstream Energy Index (AMNA) was down by -1.2%, underperforming the 10.9% return of the S&P 500 Index. Oil prices continued their decline during the quarter, and though prices rebounded, oil ended the quarter at levels lower than at the beginning of the year.
In the beginning of the year, natural gas spiked off multi-year lows as seasonal electricity demand expectations along with the long-term need for new electricity generation will benefit natural gas—the most environmentally friendly fossil fuel. Long-term natural gas demand growth remains a positive tailwind and recent bolt-on investment projects have the potential to drive accelerated cash flow growth over the next three to five years.
We believe that, over the longer term, midstream energy companies will play an important role in our energy future. The global energy transition will require multiple sources of energy to be successful and hydrocarbons—especially natural gas—will continue to have a role, driving future demand, not just for the commodities, but for the essential logistical systems that move them. With physical steel in the ground, midstream energy infrastructure companies have difficult-to-replicate asset networks with high barriers to entry, and whose adaptability to transport other energy sources is underappreciated. Management teams are increasingly aware of the role they will play in our energy future, focusing not just on the environmental impact of their operations but also on how their asset bases can and will be part of a greener future.
The utilities sector of the S&P 500 index performed well during the second quarter, outperforming the broader market. The solid performance was driven by several factors, including continued concerns about the Trump administration’s uncertain tariff policies causing a potential recession in the U.S., which contributed to investors rotating into “safe haven” securities such as utilities.
After experiencing a relatively weaker prior quarter, power generation companies as well as data center stocks rebounded in 2Q25. Investor sentiment regarding AI-related stocks served as a strong tailwind for U.S.-based power generators and data center companies in the most recent quarter. These stocks had also rallied throughout 2024 as key beneficiaries of strong demand due to accelerating AI-related capex. We believe strong long-term fundamentals and still-reasonable valuations underscore the opportunity in the utilities sector. The S&P 500 Utilities Index increased by 4.3% in 2Q25, underperforming the 10.9% return of the S&P 500 Index.
Continued solid execution, along with the potential growth opportunities from renewable energy investments, should help to drive the sector’s earnings going forward. Strong fundamentals and macro factors underscore the opportunity in the sector, especially given what remains a lower-than-average interest rate environment.
Alerian Midstream Energy Index is a broad-based composite of North American energy infrastructure companies and is a capped, float-adjusted, capitalisation-weighted index whose constituents earn the majority of their cash flow from midstream activities involving energy commodities. Alerian MLP Index is the leading gauge of energy infrastructure Master Limited Partnerships (MLPs) and is a capped, float-adjusted, capitalisation-weighted index, whose constituents earn the majority of their cash flow from midstream activities involving energy commodities. S&P 500 Index is an unmanaged index of 500 common stocks of large U.S. companies, weighted by market capitalisation. It gives a broad look at how U.S. stock prices have performed. S&P 500 Financials Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) financials sector. S&P Composite 1500 Health Care Index comprises those companies included in the S&P Composite 1500 that are classified as members of the Global Industry Classification Standard (GICS) healthcare sector. S&P 500 Technology Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) technology sector. S&P 500 Utilities Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) utilities sector. Indices are unmanaged and an investment cannot be made directly into an index.
References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced may or may not be held in the portfolio at the time of publication and, if such securities are held, no representation is being made that such securities will continue to be held.
The views expressed herein are those of PGIM investment professionals at the time the comments were made, may not be reflective of their current opinions, and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. Neither PFI, its affiliates, nor their licensed sales professionals render tax or legal advice. Clients should consult with their attorney, accountant, and/or tax professional for advice concerning their particular situation. Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy.
Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
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