U.S. Equity Outlook

Explore Our investment Outlook

Disconnect Between Earnings, Economic Conditions and Stock Prices

Even as stock prices recover, corporate earnings and economic activity are going the opposite direction. Jobs, inflation, economic growth and survey data all point to a serious economic slowdown. The National Bureau of Economic Research recently declared that a U.S. recession officially began in February.

With downward revisions to corporate earnings estimates and stock prices rising, equities are increasingly expensive by historical standards. As of early June, Bloomberg data show the trailing 12-month price to earnings (P/E) ratio for the S&P 500® Index is 21.2. Stocks are even more expensive if we look at future earnings projections—the forward 12-month P/E is 24.3, the highest since 1998. And, according to FactSet, S&P 500 company earnings declined almost 15% in the first quarter, the largest decline since the third quarter of 2009, in the wake of the financial crisis.

Stock prices and earnings moving in different directions isn’t unknown—prices often peak or trough before earnings do so. But it’s also true the market is betting heavily on a sharp recovery that hasn’t yet appeared in the data. So, while it’s possible the market is correct in forecasting an earnings recovery, our data suggest caution is likely in order. 

The disconnect between stock prices and fundamentals could be setting up the market for volatility if earnings and economic data don’t catch up. Be sure your portfolio aligns with the level of risk you’re willing to accept.
–Peruvemba Satish, CFA

Dividend Cuts and Suspended Payouts Have Shaken Investors

Fallout from the coronavirus pandemic has changed the landscape for dividend-oriented investors. Dividend cuts and suspensions are now on a pace to exceed those of the 2008-2009 financial crisis. Furthermore, approximately 65% of companies are reducing their dividends and opting to suspend payouts altogether, compared to only 29% during 2008-2009. Overall, dividend payouts are expected to fall 10% - 30% this year, with the largest cuts emanating from companies in the energy and consumer discretionary sectors.

For some investors, a company’s decision to cut or suspend its dividend is a signal that it’s time to sell. We believe it’s a more nuanced decision. While some companies may become permanently impaired during the pandemic, others are solid businesses that should ultimately recover from transitory problems. For a deeper dive on some of the sectors most affected by dividend cuts see our article "Where Should Dividend-Oriented Investors Look for Opportunities Now?"

Despite what some call a dividend crisis, we believe the historic long-term performance of dividend-paying companies demonstrates the value of owning dividend-paying stocks. During the 20 years ended March 31, 2020, the highest-yielding companies in the Russell 1000® Index posted a 9.4% annual return. Over that same period, companies that didn’t pay dividends gained just 4.4% and the overall index rose only 4.9%.

Of course, there’s more to it than simply buying dividend payers. We believe high-quality companies are more likely to maintain or increase their dividends despite tough times. The characteristics we look for in those businesses are high, stable and sustainable returns on capital, solid free cash flow generation and clean balance sheets. Their superior financial productivity implicitly enables them to pay and increase their dividends over time. In a time of unprecedented uncertainty about which companies can pay their dividends, we are focusing on those we believe have brighter futures.

We’re focusing on higher-quality companies that we believe can not only withstand the current downturn, but also grow their businesses and dividends going forward.
–Kevin Toney, CFA

You Must Be Present to Win

Paper or plastic? Chicken or tofu? Growth or value? Whether the market will rotate from growth to value is sometimes framed as a binary choice to own one or the other. Most investors have exposure to both. Regardless of how the investing style pendulum swings, we believe investors should have a presence in traditional growth sectors to participate in transformational advances in health care and technology.

We are looking at various investment opportunities that health care innovations are creating. These innovations include telemedicine, a technology whose use has become invaluable during the ongoing pandemic, and new cancer treatments that are decreasing mortality rates. One such gene-editing therapy won U.S. Food and Drug Administration approval just last year.

New developments in 5G cellular technology will bring significant improvements in speed, reliability and latency. We think second-order benefits, including intelligent roads and vehicles, are particularly compelling. The speed of this next-generation network bolsters the impact of the Internet of Things by increasing connectivity between devices and thereby generating higher levels of productivity. American Century Senior Investment Analyst DJ Cross provided a deeper analysis of 5G investment opportunities in a recent article.

Growth strategies can help investors gain exposure to these breakthrough developments. While there certainly will be periods when health care and technology fall out of favor, we believe you must have exposure to these sectors to participate in their potential.

We aren’t letting concerns about potential short-term style rotation get in the way of positioning our portfolio to potentially benefit from transformational advances in health care and technology.
–Gregory Woodhams, CFA

Reopening of Economy and Demographics May Boost Health Care Stocks

Even though health care stocks have generally outperformed during the pandemic, there’s been a distinct divergence between stocks correlated to elective versus non-elective health care services. For example, many people have delayed knee replacements, which has curbed revenues for makers of orthopedic medical devices. On the other hand, pharmaceutical companies have fared better because people continued to order prescriptions, including many who switched from 30-day to 90-day supplies.

Looking into the second half of the year, we’re carefully assessing how the wide range of companies in the health care sector will perform as the economy reopens. As people start to undergo deferred medical procedures, we believe select health care stocks will likely benefit.

We expect pharmaceutical companies to continue to benefit from the wave of aging baby boomers. U.S. Census Bureau data indicates Americans older than 64, high users of prescriptions, will outnumber those 18 and younger by 2035. We view this as a long-term positive for pharmaceutical companies, but investors should expect volatility because these companies often serve as political punching bags. In our view, this volatility creates opportunities to buy companies temporarily trading below their fair value. 

Health care stocks have outperformed, and we believe underlying trends supporting the sector remain positive.
–Kevin Toney, CFA

Q3 2020 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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