Decoding Allspring's Q3 Performance: Growth Strategy in a High-Growth Market

Building on the fund's growth thesis, its core strategy faces a market environment testing its thesis. The Allspring Common Stock Fund pursues long-term capital growth by hunting for undervalued small- and mid-cap companies. Managers employ a style-agnostic blend of growth and value, deliberately seeking stocks priced below just 50-80% of their perceived private market value (PMV), aiming to sell closer to the upper end of their estimated trading range. This deep-value approach sits in stark contrast to the broader market's recent behavior.

Q3 2025 delivered extreme volatility, particularly in how investors reacted to strong earnings. Over 85% of S&P 500 companies beat earnings estimates, a surprisingly high bar being cleared. Yet, these positive surprises often triggered wild price swings – either sharp jumps or sharp selloffs – rather than steady gains. This disconnect highlighted how market expectations had become highly skewed, amplifying reactions beyond traditional earnings surprises alone.

The IT sector was a prime driver of this earnings strength but also exemplified the divergence. It powered the S&P 500's impressive 14% Q3 earnings growth, far exceeding the 7% analyst forecast, largely fueled by AI advancements that also boosted utilities and industrials. IT alone posted 40% EPS growth, a staggering figure. However, even amidst this sectoral boom, stock prices didn't always march in step with earnings, particularly for AI-exposed names. This environment of high earnings but volatile pricing underscores the challenge for funds like Allspring: their deep-value, conviction-driven approach must navigate a market where broad upside is hard to find but pockets of strength face intense scrutiny and rapid repricing. The fund's focus on specific undervalued segments may offer resilience, but its success hinges on finding conviction plays that can outperform in such a reactive market.

Performance Results & Sector Mismatch

Building on prior market observations, this section addresses the Allspring Common Stock Fund's specific performance issues in Q3 2025. The fund underperformed the Russell 2500 Index, largely due to negative stock selection in information technology, industrials, and healthcare sectors. This weakness was particularly evident in the IT sector, which saw 40% EPS growth far outpacing the fund's ability to capture this surge.

The contrast between sector strength and fund performance is striking. While the IT sector drove significant earnings gains, fueled by AI advancements, the fund's stock picks in this area failed to deliver. This disconnect highlights a potential flaw in the investment approach, where sector-level growth did not translate to individual stock success.

A key downside is that if the fund continues to miss such high-growth opportunities, its long-term strategy may need urgent reassessment. The risk of persistent underperformance looms, especially as AI remains a critical growth driver across multiple sectors.

Strategic Misalignment Risk

The fund's core undervalued stock approach faces significant pressure from the AI-driven market dynamic. Its strategy focuses on buying small- and mid-cap companies undervalued relative to private market value (PMV), typically targeting prices below 50-80% of that benchmark. However, AI's explosive growth is reshaping market valuation frameworks, particularly favoring large-cap technology names. This creates a fundamental tension: the very sectors the fund underweighted in Q3 2025 (information technology, industrials, healthcare) were major beneficiaries of the powerful AI earnings engine driving the broader market. While the fund seeks to exploit market inefficiencies and undervaluation, the AI narrative is compressing valuation multiples and elevating growth expectations across many segments, making traditional PMV-based undervaluation harder to identify and sustain, especially in AI-adjacent areas.

Monitoring Key Metrics

Performance monitoring must intensify focus on specific metrics signaling persistent misalignment. A key indicator is the fund's average purchase price relative to PMV falling consistently below the 50-80% target range, suggesting increasing difficulty finding truly undervalued opportunities in the current environment. Simultaneously, we must track sector momentum shifts; a sustained divergence where the Information Technology and Healthcare sectors significantly underperform the broader market, or fail to generate outsized returns comparable to the explosive 40% EPS growth seen in IT during Q3 2025, would confirm the strategy's lagging behind the dominant AI theme. Crucially, the fund's ability to outperform or even match the remarkable earnings growth demonstrated by the "Magnificent 7" (21% EPS growth) and the broader tech sector must be assessed regularly. A persistent gap here, without a corresponding alpha source, reinforces the risk that the fund's traditional approach is becoming less effective against AI-driven market leadership.

Consequence of Weak AI Earnings Traction

Persistent weakness in the fund's allocations to AI-impacted sectors carries tangible consequences, primarily linked to the sustainability of AI-driven earnings growth. The Q3 2025 results showed AI as a key differentiator, boosting earnings not just in IT but also in utilities and industrials, while the S&P 500 overall delivered 14% earnings growth, well above expectations. If AI earnings traction falters or fails to accelerate further, the valuation premium currently enjoyed by AI leaders could erode rapidly. This scenario would fundamentally challenge the fund's undervalued stock thesis. With the market already pricing in significant AI impact, a slowdown could lead to broader repricing, making it even harder to find the deep value the fund seeks without exposure to these high-growth narratives. Continued underperformance relative to the AI-driven market could undermine investor confidence in the strategy's relevance in the evolving economic landscape.