Franklin Small Cap Value Fund Q2 2025 Commentary

2025-07-27 23:16:00 ET

Key Takeaways

• Markets: US small-cap stocks, as measured by the Russell 2000 Index, advanced during the second quarter of 2025. After rebounding from April’s lows on US tariff policy, small-cap equity markets continued to rally through June despite bouts of volatility. Temporary delays in tariff hikes, reduced fears of a recession, growing expectations of interest-rate cuts later in the year and easing geopolitical tensions helped drive US stocks higher.
• Contributors: Stock selection and an overweight in industrials, an underweight in real estate and stock selection and an underweight in health care contributed to relative returns. QinetiQ Group (QNTQF)(QNTQY), Babcock International (BCKIF)(BCKIY) and Elementis (ELMTY)(EMNSF) were among the biggest contributors.
• Detractors: Security selection in information technology, communication services and financials curbed relative results. Detractors included ACI Worldwide (ACIW), Cable One ( CABO ) and Avient (AVNT).
• Outlook: While we believe there are reasons to be optimistic about the markets, we think uncertainty surrounding trade and geopolitics could continue to be destabilizing factors in the near term. Economically sensitive small-cap stocks are down about 10% from post-election highs. While we are seeing some attractive entry points to quality names, we think a more favorable interest rate environment and clarity around trade policy would support near-term appreciation.

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