Explore Our investment Outlook
News of rising inflation—including some of the highest year-over-year inflation data in decades—has dominated headlines for months. It was (almost) enough to push pandemic updates off the front page. But investors don’t need to scan the financial press to understand the effects of inflation. A quick trip to the grocery store or gas pump tells them all they need to know about higher prices for goods and services.
Investors may also feel the pinch of inflation on the stocks of long-duration, high-growth companies. Like long-duration bonds, such firms are valued based on potential cash flows projected far into the future. They carry higher price-to-earnings (P/E) multiples as investors are willing to pay more for these anticipated future earnings. Higher inflation and interest rates pressure those multiples and increase the discount rate used to value those companies now.
We’re maintaining our focus on earnings growth, valuations and the gap between our estimates of key business metrics and Wall Street estimates of those measures. While not our primary focus, we factor the current environment into our analysis of whether results can be sustained.
Companies with the pricing power to pass on higher costs to their customers may have the ability to better weather an inflationary environment. This can be supported by inelastic demand for their goods and services. Offering innovative, market-leading products can also help sustain strong demand despite higher prices. Advances in productivity can also help offset higher costs.
Additionally, we seek companies with unique growth drivers. These can include merger and acquisition activity, product innovation, corporate reorganization, and other synergies that improve the bottom line.
We believe companies that can deliver earnings growth will be rewarded despite the inflationary environment. Thus, we continue to find growth stories where the value of the investment is tied to long-term earnings growth expectations.
Recent economic data suggest we may be approaching a turning point for supply chain pressures. The Global Supply Chain Pressure Index, a new barometer from the Federal Reserve Bank of New York, suggests manufacturing indicators and shipping costs remain high but are beginning to moderate as shown in Figure 3. Simultaneously, supplier delivery times across a range of sectors are also improving.
Data from 1/1/2019-12/31/2021. Source: FactSet, Federal Reserve Bank of New York. Chart shows standard deviation from the average value. An upward trend in the data indicates supply chain pressure is rising while a downward trend indicates supply chain pressure is declining.
The distinguishing feature of the current global inflation shock is a synchronized run-up in global goods prices, which can be linked to supply chain disruptions. Much of the pressure has been reversed thanks to the shift away from zero-COVID policy in Asia. As delivery times improve, and port congestion in Southern California eases, our outlook improves.
The jump in production should continue as easing COVID restrictions make goods more available and reduce shipping backlogs. We expect port congestion to continue to lessen significantly.
Finally, global semiconductor production has ramped up to meet demand. According to the Semiconductor Industry Association, capital spending on chip production rose sharply over the last two years while output rose to record levels. Improved global auto production in the fourth quarter of 2021 is evidence these semiconductors have been making their way through the improved supply chain. We expect reduced mobility restrictions will further improve supply chain operations, to the benefit of many industries and sectors.
References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risk considerations, including economic and political conditions, inflation rates and currency fluctuations.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
Diversification does not assure a profit nor does it protect against loss of principal.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.