Charting Growth Through Changing Tides

Charting Growth Through Changing Tides

Matt Freund, CFA, Michael Kassab, CFA

Summary Points:

• Our investment process seeks companies with quality growth criteria and exposure to powerful thematic growth trends, including the mega-cap "Magnificent Seven" as well as growth opportunities in different sectors, across market caps.
• In 2025, we see continued upside for select growth stocks, with a broadening of market leadership.
• However, we expect gains to be driven by bottom-up improvements in fundamentals rather than broad multiple expansion. We would also not be surprised to see a greater divergence of fortunes within the Magnificent Seven.

US equities had a second straight year of strong gains, overcoming with surprising ease a "wall of worry" about an aging economic cycle, geopolitical tensions, and the election outcome. While this positive backdrop supported equity markets broadly, growth stocks once again led the way for a second straight year.

The US economy displayed surprising strength in 2024, especially compared to Europe and China. At the same time, the Fed surprised the markets with a 50-basis point cut in September, which re-ignited confidence in the "Fed put," should the market need it. The most significant news, however, was Donald Trump's re-election and a narrow Republican sweep of Congress, which sparked market excitement about additional tax cuts and a more business-friendly regulatory environment.

The largest US companies, commonly called the Magnificent Seven, turned in another stellar year, with all but one outpacing the broader markets. Calamos Growth Fund's investment process focuses on identifying companies with superior growth profiles that are shaping tomorrow's opportunities, which has led to meaningful allocations in each of these transformative pioneers. The fund also benefited from positions across many different industries and market caps, proving once again that growth comes in many forms.

The remarkable market strength demonstrated throughout 2024 appears poised to extend into 2025 as corporate earnings maintain their upward momentum. However, as the closing days of 2024 remind us, there will surely be choppiness along the way. With valuations already reflecting considerable optimism, we believe further equity gains will depend more heavily on improving corporate fundamentals, rather than broad multiple expansion. This environment demands heightened selectivity going forward, namely the ability to identify companies capable of exceeding elevated expectations.

Expanding Opportunity Set

A particularly interesting development is unfolding within the Magnificent Seven stocks as these technology-driven titans begin charting increasingly independent courses. This divergence marks a mature phase of the digital transformation story, where individual execution and strategic positioning eclipse the broader thematic tailwind. 2025 appears positioned as an inflection point for artificial intelligence investments as beneficiaries transition from chip designers and manufacturers to early corporate adopters that should begin to see tangible benefits from their earlier investments.

The consumer foundation remains sturdy, supported by healthy employment trends and moderating inflation pressures. This environment, coupled with renewed corporate confidence and a more favorable regulatory environment, sets the stage for a renaissance in capital markets activity, particularly in mergers and acquisitions and initial public offerings. The broadening of market leadership suggests a more diverse opportunity set for investors.

Nevertheless, several policy imperatives warrant vigilant monitoring, including the trajectory of trade negotiations, the economic implications of immigration policies, the execution of government efficiency initiatives, and inflation trends that are still above Fed targets. The new administration has promised to tackle problems that have burdened the economy for decades, but Congress is deeply divided, and the obvious solutions have long been exhausted. Market volatility will likely remain an inherent feature of the 2025 landscape, yet the dual cushion of accommodative monetary policy and business-friendly fiscal measures should contain the magnitude of market drawdowns.

Looking Ahead

While our 2025 outlook maintains a constructive bias, investment success will likely require a greater emphasis on fundamental analysis and active management. The convergence of supportive policy frameworks, technological innovation, and broadening market participation may create an attractive environment for tactical opportunities that well-positioned investors can take advantage of across industries and market caps. We believe a disciplined risk-management process will prove beneficial in navigating the periodic volatility.

We anticipate that market focus will continue to broaden from the largest mega-cap stocks to the next generation of disruptors, particularly as a supportive regulatory environment begins to emerge. In this environment, we will continue to focus on being well compensated for the risks taken. Over the long term, we believe that doing so will generate strong risk-adjusted returns.

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