U.S. Equity Outlook

Explore Our investment Outlook

Businesses Break New Ground as Key Trends Expand and Accelerate

The pandemic is pulling forward growth themes.

Even amid the most dismal earnings forecasts of 2020, it was clear COVID-19 was accelerating certain trends. These include cloud computing, the Internet of Things, digital payments and buildout of the 5G cellular network. So, while overall corporate earnings posted their biggest declines since the financial crisis, some companies didn’t miss a beat. The best performers included companies providing technology that enables working from home, videoconferencing, video streaming and social networking. As we enter 2021, we expect these trends to continue as new consumer habits and business practices born of the pandemic become permanent.

The impact of transformational technology isn’t limited to tech companies.

The economy’s digital transformation extends well beyond businesses we consider to be technology companies. For example, in health care, computational biology is enabling drug discovery that wouldn’t have been possible a few years ago. Telemedicine will only get better with 5G networks. In the industrial sector, autonomous vehicles will become a reality with 5G networks. Meanwhile, payment networks and digitization are driving online purchases and home delivery for everything from highly specialized technical products to everyday goods.

Sustainability continues to drive corporate and investor decision-making.

In recent years, companies have made great strides in reporting their advances in environmental, social and governance (ESG) sustainability. Many have established sustainability desks dedicated to engaging with investors on ESG topics. The market’s enthusiastic response has been reflected in the number of assets flowing into ESG portfolios. For our part, even in strategies without explicit ESG mandates, we seek to identify potential financial impacts that come from ESG issues.

Structural Changes Can Drive Long-Term Investment Returns

De-densification is reshaping the real estate market.

The millennial migration from urban cores will likely be with us in 2021 and beyond. Ongoing effects of the pandemic, continued low mortgage interest rates and the acceptance of work-from-home practices should boost this trend. Beneficiaries should include home builders, landlords of single-family homes, timber real estate investment trusts (REITs) and a variety of housing-related companies. We expect remote work to further reduce urban office needs and accelerate suburban office needs going forward.

Renewable energy offers long-term investment opportunities for utilities.

Declining technology costs and growing environmental concerns have created opportunities for utilities to transition power generation from coal and natural gas to renewable sources such as solar and wind. Investments in renewable generation will lead to higher capital spending, drive long-term rate growth and potentially increase earnings per share. We believe government entities will support renewables by enacting policies intended to lower greenhouse gases and combat global warming. Renewables should also propel advancements in related technology, such as battery storage.

The era of the electric vehicle (EV) is near.

Concerns over climate change, regulatory pressures, technical innovations in batteries and significant investments in EV platforms are helping increase global adoption of EVs.  Select vehicle manufacturers, EV powertrain/component suppliers and charging infrastructure suppliers may benefit from this historic disruption of the automobile industry. Autonomous vehicles (AVs) are progressing at a somewhat slower pace. Companies that can deliver Advanced Driver Assistance Systems and related components will benefit from the AV trend, particularly in its early stages of development.

The Outlook for Stocks Brightens as the Earnings Recovery Widens

Conditions are favorable for global equities.

Our proprietary model of risk and financial conditions is positive on equities. Stock market volatility is falling, interest rates remain low, corporate credit markets appear healthy and other measures of market stress all look positive or are trending in the right direction. This is a remarkable contrast from just a quarter ago when the relationship between high and low growth and high- and low- profitability companies was at the highest levels in decades. Now, these measures have just begun to return to normal, with plenty of room for a sustained recovery by value-oriented stocks and lagging sectors relative to the previous handful of high-fliers. 

There’s a broader opportunity set.

All over the globe, we’re seeing a definite improvement in corporate earnings. This is particularly true in more economically cyclical sectors such as financials, materials and energy. Better fundamentals after underperforming in 2020 means these economically sensitive stocks are attractively valued as we head into the new year. Contrast these conditions with the pandemic bear market and recovery, when earnings growth was scarce and gains were concentrated in a handful of sectors and industries.

Keep an eye on inflation.

Even as an economic recovery seems to be increasingly likely in the new year, inflation remains modest. Of course, it pays to remember where we’re coming from—the rate of inflation fell to virtually zero in mid-2020, the lowest level in five years. Inflation has since rebounded somewhat but is still nowhere near where it stood before the pandemic. What’s more, our measure shows downside risks to inflation emerging in the near term. Current yields for Treasury inflation-protected securities (TIPS) also suggest a benign inflation outlook. Nevertheless, we think inflation deserves watching—if the COVID economic shock eases and growth rebounds as widely expected in the second half of 2021, it would seem reasonable for inflation to catch up with growth.

Q1 2021 Investment Outlook Resources

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.

Alternative mutual funds that hold a variety of non-traditional investments also often employ more complex trading strategies than traditional mutual funds. Each of these different alternative asset classes and investment strategies have unique risks making them more suitable for investors with an above average tolerance for risk.

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.

As with all investments, there are risks of fluctuating prices, uncertainty of dividends, rates of return and yields. Current and future holdings are subject to market risk and will fluctuate in value.

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.

Past performance is no guarantee of future results. Mutual fund investing involves market risk. Investment return and fund share value will fluctuate. It is possible to lose money by investing in mutual funds. 

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.

This information is for educational purposes only and is not intended as investment or tax advice.

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