Franklin Templeton Funds: Q2 2024 Performance and Market Insights

Franklin Growth Opportunities Fund Q2 2024 Commentary

US inflation showing signs of easing, Fed reducing projected rate cuts, focus on AI-related stocks and other secular growth themes for investment opportunities. 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. The fund's return was positive over the period but underperformed the Russell 3000 Growth Index benchmark. In the information technology ('IT') sector, an underweight in Apple (AAPL) detracted most from the fund's relative returns. In May, the technology giant reported record earnings that exceeded consensus expectations, partly driven by a strong increase in the services segment over the prior year. It also announced a record US$110 billion share buyback plan. Apple's stock was further buoyed by its announcement in June of the gradual rollout of Apple Intelligence, the company's long- awaited foray into AI. In contrast, IT holding Monolithic Power Systems (MPWR), a producer of specialized power management chips, helped performance. Monolithic's shares rose following the company's release of first-quarter 2024 earnings and revenues that exceeded consensus expectations. The company's enterprise data segment is expected to potentially benefit from increasing data-center electricity demands linked to the proliferation of AI. In the consumer discretionary sector, a position in Fanatics Holdings (FANA) detracted from relative returns. Softening consumer demand has weighed on the revenue growth of the sports merchandiser. We continue to expect improvements in the company's collectibles and commerce segments ahead. US inflation showed signs of easing during the quarter, though it still remained above the Fed's target level. The Fed reduced its projected number of interest-rate decreases for 2024 from three to one, while remaining open to the possibility of two. We think the US stock market is on a generally positive trend and inflation should ease gradually, possibly allowing for rate reductions later in the year. Equity market performance has recently been dominated by a small number of AI-related stocks. Within the technology space, we continue to expect enterprise technology companies to play a leading role in driving the adoption of generative AI. We see generative AI as an enabling technology that should help improve corporate productivity, lower costs and drive increased efficiency across many sectors of the market. In addition, we expect several other secular themes to provide tailwinds for growth. For example, we remain excited about innovations within health care, including new drug discoveries, surgical robotics, genomic advances and improving bioprocessing systems. We see additional potential for companies that are playing leading roles in society's ongoing energy transition and electrification. We also see opportunities stemming from the reshoring and retooling of America's manufacturing base, which we believe could be a multidecade trend. We are mindful of the macroeconomic environment while using active management and fundamental research to act swiftly and effectively in today's dynamic markets. We have been identifying opportunities in what we deem to be high-quality businesses that can benefit from lasting secular growth trends and maintain leading competitive positions along with strong balance sheets. In terms of portfolio positioning, we have been conducting partial sales amid share-price strength in some of our mega-cap tech holdings and reinvesting the proceeds into areas that have lagged the rally but, in our analysis, can potentially offer high-quality revenue and earnings growth. Additionally, we continue to focus on areas of the mid- and large- capitalization tiers where valuations are appealing, in our assessment. Many of these companies are high-quality businesses with sustainable multiyear growth prospects. Currently, our largest sector exposure is in IT, where we favor software companies, especially those driving the future of AI.

Franklin Growth Fund Q2 2024 Commentary

Outlook is optimistic with focus on AI, medical tech, and energy transition; investing in quality businesses for long-term growth. 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. 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. 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. 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.

Franklin Small-Mid Cap Growth Fund Q2 2024 Commentary

US inflation showing signs of easing, potential rate reduction later in the year. Focus on companies driving digital transformation and AI for long-term investments. Major US indexes reached new record highs during the second quarter of 2024. While the Dow Jones Industrial Average 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. The fund underperformed its Russell Midcap Growth Index benchmark in the second quarter. In the health care sector, Repligen (RGEN) reported first-quarter financial results that disappointed investors and weighed on its stock. Profits for the biological drug manufacturer continued to be impacted by a decline in COVID-related revenue along with general weakness in the bioprocessing industry. We believe that bioproduction is an attractive place to invest given the predictability of revenues and the long-term growth profile from the adoption of more complex drugs. Consumer discretionary sector performance was pressured by discount retailer Five Below (FIVE). The company reported a decline in first-quarter earnings due to a slowdown in comparable store sales due, in part, to weak discretionary spending. We believe the company's strategies are sound and the current low-demand environment should turn around as the economy strengthens. Conversely, Pinterest (PINS) was a leading contributor in the communication services sector. The image social media company reported strong acceleration in revenue growth during the first quarter due to an increase in active users and the use of AI to help drive greater returns for advertisers. One-Month Key Performance Drivers The fund's return was positive but lagged the benchmark in June. At the stock level, Lattice Semiconductor's (LSCC) shares experienced a downturn after its chief executive officer departed, which weighed on investor sentiment. The consumer staples sector's underperformance versus the benchmark was largely due to a position in Celsius Holding (CELH). The energy drink company has been experiencing softening sales trends, which has weighed on its stock. In contrast, Wingstop (WING) was a leading contributor in the consumer discretionary sector. The fast-casual restaurant chain has been improving its supply-chain initiatives and expanding into new markets, benefiting its stock. US inflation showed signs of easing during the quarter, though it remained above the Fed's target level. We expect inflation to continue to gradually moderate, possibly allowing for a rate reduction later in the year. As the scope of the equity market broadens, we anticipate several appealing secular themes to unfold. For example, companies in many sectors are adopting digital transformation and AI as management teams see the benefits it provides, such as improved efficiency and reduced business expenses. We then seek companies that, in our view, are driving or benefiting from these trends and have sustainable competitive advantages. These advantages often manifest themselves in exceptional growth, profitability, consistency or, ideally, all three. We remain excited about compelling innovations within the medical technology space, including surgical robotics and bioprocessing systems. We see potential in several companies that are playing leading roles in society's ongoing energy transition and digital transformation. We also expect enterprise technology companies to play a leading role in driving corporate productivity, which includes advances in AI tools and business solutions. There is innovation taking place across virtually every economic sector, which bodes well for small and mid-cap companies, in our view. We believe small- and mid-cap growth companies offer some of the most compelling long-term investments as they disrupt existing markets and their innovation creates new market opportunities. Identifying companies early on in their maturation phase can potentially generate powerful economic returns, in our view.

Franklin Rising Dividends Fund Q2 2024 Commentary

Portfolio saw relative detractors from lack of exposure to Nvidia and Apple, but benefitted from investments in Analog Devices and Microsoft. In the second quarter of 2024, the S&P 500 (SP500, SPX) reached new record highs and posted a solid quarterly gain, driven by enthusiasm around artificial intelligence ('AI') and optimism that the US Federal Reserve (Fed) might begin cutting interest rates as soon as September. The Fed kept the federal funds target rate unchanged at a 23-year high at its May and June meetings, while continuing to reduce its bond holdings. In June, the Fed reduced its projected number of rate cuts for 2024 from three to one, though Fed Chair Jerome Powell left the possibility of two 2024 rate cuts open at the post-meeting press conference. Annual inflation, as measured by the core personal consumption expenditures price index -- the Fed's preferred inflation gauge -- rose in May at the slowest rate since March 2021 but remained above the Fed's target. The US labor market remained strong during the quarter; while the unemployment rate rose in April and May, jobs and average hourly earnings grew at a faster pace in May after softening in April. Meanwhile, gross domestic product expanded in 2024's first quarter at a significantly slower annual rate than in the prior quarter. Of the 11 sectors in the S&P 500, information technology and communication services performed strongly, while materials and industrials were among the six sectors that experienced negative results. Large-capitalization stocks collectively rose and outperformed mid- and small-cap stocks, both of which generally declined, with growth faring better than value in all three market-cap tiers. Within the information technology sector, the fund's lack of exposure to chipmaker Nvidia (NVDA), which does not meet our dividend growth criteria, was the quarter's largest overall relative detractor. The stock is heavily weighted in the benchmark, and Nvidia continued to benefit from AI optimism, given its position as the key supplier of advanced chips as companies build out generative AI capabilities. The company's shares posted a sharp advance as its first-quarter earnings beat analysts' high expectations, driven by surging revenue growth from cloud-computing data centers and Nvidia's expectations of continued strong results. Our underweight to technology giant Apple (AAPL) also substantially hindered relative returns as its shares rallied after a weak start to the year. In May, the technology giant reported earnings that exceeded consensus expectations, driven by a sharp increase in services revenue and better-than-expected revenues from China. China, a sluggish smartphone market, and concerns that Apple has lagged in the AI race have been headwinds for Apple shares. Quarterly iPhone sales declined year-over-year. In June, Apple announced its gradual rollout of Apple Intelligence, the company's long-awaited foray into AI, and a partnership with ChatGPT's parent, OpenAI (not a fund holding). In contrast, semiconductor design and manufacturing company Analog Devices (ADI) was a key relative contributor. Its quarterly results surpassed estimates, backed by increasing new orders and cost-control efforts. The company forecasted stronger-than-expected revenue for the current quarter, bolstered by rising demand for high-bandwidth memory chips. Management expressed optimism that inventory corrections by customers are stabilizing and pointed to signs of a cyclical recovery after a long slump. We appreciate the company's move away from cyclical, consumer-oriented industries toward industrial and automotive applications. Underweight exposure to Apple curbed relative returns during the month as its shares continued to rally. The stock notched a series of all-time highs in the wake of the company's Apple Intelligence announcement, which set forth Apple's AI strategy. Footwear and sportswear manufacturer Nike's (NKE) shares have been under pressure since December, and they declined sharply in late June, as quarterly earnings disappointed, weighed down by declining sales in the lifestyle segment and Nike's direct-to-consumer business. Nike's fiscal 2025 guidance forecast a revenue drop, owing to softening demand in China and increasing competition in the footwear space. Conversely, overweight exposure to enterprise software giant Microsoft (MSFT) contributed on a relative basis, as the stock's rally continued. Its shares benefited from the company's early entry into AI through its significant investment in ChatGPT parent OpenAI (not a fund holding), as well as continuing growth across multiple businesses, including its global cloud computing platform, Azure, as well as server products and personal computers. We continue to believe that a diversified portfolio consisting of high quality, market-leading companies is best positioned to take advantage of market opportunities. Investor optimism has increased in recent months as the outlook for economic growth and the path of inflation have improved. Companies continue to report generally healthy earnings across sectors. As we monitor various economic readings, we remain optimistic about the opportunities we see in the market and for the initiatives being pursued by the companies in our portfolio. Optimism around likely economic outcomes has largely continued to improve in recent periods, given the overall strength of the US economy and consumers' ongoing resilience. Inflation has moderated, and the expectation remains that the Fed will cut its benchmark interest rate later this year. However, the outlook and timing for rate cuts seems less clear. We believe some caution remains warranted, given that inflation has remained more stubborn than expected. In the first six months of 2024, market expectations for rate reductions during the year have moved from as many as seven to potentially just one. The situation remains fluid. In view of some uncertainties, we are watching for signs of an economic slowdown, including the possibility of slowing corporate profit growth. We monitor corporate earnings closely, looking for insight into the trends companies discuss and how their plans for capital spending might evolve. Corporate profits have remained solid over the past year-plus, and the high single-digit gains currently expected for 2024 reflect relatively strong growth. We have continued to look for, and found, opportunities to invest in high-quality businesses during the first half of 2024. Dividend growth for the broad market roughly mirrors earnings growth and continues to be positive. We remain encouraged about dividend trends for our portfolio companies, given growing earnings and cash flow growth. The outlook for dividend growth could become more cautious if economic conditions deteriorate, but trends remain positive. Historically, dividends for companies held in the portfolio have proven to be more resilient than the broader market during challenging times. We would expect that dynamic to continue if conditions worsened. This strategy is not new for us -- we have consistently sought to invest in companies with strong business models, growing and resilient earnings streams, sustainable cash flows and strong balance sheets that enable them to navigate times of economic uncertainty. We seek companies that can benefit in part from their exposure to secular growth themes that we believe can provide excellent capital appreciation opportunities over the longer term. We believe companies with consistently rising dividends should, over time, have the potential to realize stock price appreciation. During periods of market volatility, we look for opportunities to buy shares at what we believe are attractive prices to help maintain the portfolio's balance and stability in what could be a volatile market.