Franklin Equity urges US exposure beyond the Magnificent Seven

Investors should continue to hold US equities despite the market’s recent decline, but should reduce their dependence on the largest technology companies, according to Grant Bowers of Franklin Equity Group, as reported by The Edge Malaysia.

Bowers, a senior vice-president and portfolio manager, said US companies still generally deliver stronger returns and profit margins than businesses in other markets. However, he recommended looking beyond the so-called Magnificent Seven — Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla — and considering a wider range of large- and mid-cap stocks.

His comments came after Wall Street suffered its steepest one-day fall in more than two years amid concerns that tariffs could produce a combination of weak growth and persistent inflation. The eventual economic effect of the escalating trade measures remained uncertain at the time of the interview.

Franklin Equity Group managed more than US$135 billion in assets as of December 2024.

A wider spread of US opportunities

Bowers said the seven technology giants remained high-quality, profitable businesses, but argued that a sustained bull market would need participation from a broader group of companies. Franklin Equity therefore holds some of the stocks while maintaining a smaller weighting than the benchmark.

He identified healthcare, financial services, industrial companies, consumer businesses and technology outside the dominant mega-cap names as areas of interest. A broader allocation, he said, could give investors exposure to the US economy without concentrating too heavily in a small group of shares.

US equities had been leading global markets before their decline began in mid-February. The S&P 500 had gained more than 20% over the preceding year. By March 11, however, six of the seven major technology stocks had posted losses for the year: Tesla was down 38.3%, Nvidia 20.4%, Alphabet 12%, Amazon 9.2%, Apple 8.6% and Microsoft 8.5%. Meta was the only member showing a gain, at 1.8%.

The sell-off reduced the group’s combined price-earnings valuation to roughly 30 times. That remained above the corresponding levels for the S&P 500, at 22.8 times, the Dow Jones, at 21.1 times, and the Nasdaq 100, at 28.1 times.

Bowers acknowledged that US shares were not inexpensive and had moved closer to what Franklin Equity viewed as fair value. He also cautioned against relying too heavily on economic forecasts, noting that predictions of a US recession two years earlier had not materialised while the market continued to rise.

Tariffs add uncertainty but not necessarily a recession

The investment manager said the US economy remained structurally and fundamentally sound, despite recent signs of strain and uncertainty linked to President Donald Trump’s tariff and foreign-policy plans.

The economy expanded by 2.3% in the final quarter of 2024, bringing growth for the full year to 2.8%. Bowers expected some of the administration’s initial tariff proposals to be negotiated into less severe measures, based partly on the outcome of proposals during Trump’s first term.

He was also relatively confident that US corporate earnings could rise by 10% to 11% this year. In his view, tariffs were more likely to push prices higher for consumers than to cause a major deterioration in corporate profit margins, although their final consequences were not yet clear.

Bowers also pointed to possible support from deregulation and lower taxes, alongside longer-term investment themes. These included generative artificial intelligence, medical innovation, renewed industrial activity and efforts to bring more manufacturing capacity back to the US.

The main risk he identified was inflation. Policies introduced by the Trump administration could have different effects, and the consequences would depend on how they were implemented. The Federal Reserve was still considered supportive, with one or two interest-rate reductions expected during the year. Bowers said another cut in the first half was possible if economic data weakened, while inflation could remain close to 3%.

US consumer prices rose 2.8% in the year to February.

AI investment remains a long-term theme

Bowers also discussed DeepSeek, the Chinese artificial-intelligence start-up that had prompted questions about the US lead in advanced AI. He viewed the company’s progress as evidence that China was developing ways to apply AI and invest in the technology, rather than a development that fundamentally threatened US leadership.

China’s limited access to advanced computing power still left it behind the US, he said. Alibaba had separately announced plans to invest more than US$50 billion in AI and cloud computing over three years, illustrating the scale of Chinese investment in the sector.

Concerns about a possible oversupply of US data centres also appeared overstated to Bowers after Microsoft cancelled a substantial amount of planned capacity. He interpreted the move as a shift in the company’s infrastructure priorities rather than proof that demand for AI-related facilities had collapsed. Microsoft has said it intends to spend more than US$80 billion on AI this year.

For investors, Bowers’ broader message was to avoid trying to predict the market’s short-term direction. US exposure need not be the largest part of a portfolio, he said, but the scale of the world’s biggest economy made some allocation worthwhile — preferably with diversification beyond its most prominent stocks.