2025 Investment Outlook

An Improved Starting Position for 2025

Looking into 2025, we’re in a much better position than last year. Some 12 months ago, the Federal Reserve (Fed) was still on hold, inflation seemed stuck above target and many were bracing for a recession.

It’s been an eventful year, but the economy is still growing, inflation is sticky but heading in the right direction and central banks worldwide have embarked on rate cutting. We also know the outcomes of elections in some of the world’s largest economies, though the ramifications for investors are still coming into focus.

Investors responded positively to these developments, with most equity markets posting year-to-date gains at the end of November.¹ This includes the U.S., which could deliver a double-digit return for the second consecutive year and the seventh time since 2016.² The U.S. bond market is also in positive territory.³

Nevertheless, uncertainty continues. The potential for volatility is high as the market digests information about questions about the economy, Fed policy, trade, geopolitics and the impact of the new U.S. president.

A Shift in Market Sentiment

In addition to healthy stock market returns, one of the things investors should take away from 2024 is a renewed appreciation for diversification. In July, we saw smaller businesses rotate into favor while the largest, fastest-growing companies that had been leading the market took a breather. Value-oriented companies also began making up lost ground on their growth counterparts.

Whether these trends can be sustained is an open question for the new year. Small-caps and value stocks were previously left behind as many investors concentrated — perhaps over-concentrated — their portfolios in a few sectors or big companies benefiting from long-term growth trends such as artificial intelligence (AI). The market’s rotation away from such areas began without warning and created missed opportunities for investors who weren’t diversified.

Where Does This Leave Investors in the New Year?

While our concerns about the potential for a recession are fading, American Century’s macro strategy team expects economic growth to slow in 2025.

Post-pandemic inflation has reset prices higher, and the lagged effects of two years of aggressive interest rate hikes continue to ripple through the economy. The pivot to reducing rates is a favorable development, but the Fed’s initial cuts haven’t significantly reduced borrowing costs for businesses and consumers.

Meanwhile, employment trends are mixed. The unemployment rate remains well below its historical average, and wages are still rising. However, the growth of disposable income is slowing, putting pressure on the consumers who keep the economy afloat.

This pressure is reflected in the growing price sensitivity of some shoppers. Retailers report that wealthier consumers continue to spend, but middle-income shoppers are trading down from pricier options to cheaper brands and discount stores. Lower-income consumers are cutting back altogether and relying on credit. We think these are trends to watch when gauging the health of consumers and the economy.

Navigating 2025: Embracing Opportunities Amid Uncertainty

In this Investment Outlook, our chief investment officers address some of the risks and opportunities they see in 2025.

• In addition to the well-known companies in AI, our investment teams are finding AI beneficiaries in areas you might not expect, including utilities.

• Rising trade tensions are creating uncertainty for emerging markets, but some countries are less vulnerable due to their diverse economies, strong domestic markets and strategic trade relationships.

• China’s extended property market downturn and weak consumer demand are hurting the sales of U.S. and non-U.S. companies that target the world’s largest consumer class.

• We favor high-quality bonds with shorter duration due to expectations for volatility amid mixed economic data, Fed easing and the implementation of Trump administration policy.

Looking ahead, it’s important to remember that every market presents risks. Diversifying across a broad range of asset classes should help spread the risk and open investors' portfolios to the broader set of opportunities that 2025 may offer.

We wish you all the best in the new year and thank you for entrusting your assets to us.

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Victor Zhang

Chief Investment Officer

^{¹ FactSet as of 11/30/2024.
² Based on the total return of the S&P 500 Index as of 11/30/2024.
³ Based on the Bloomberg U.S. Aggregate Index as of 11/30/2024.}