2025 Investment Outlook
Third Quarter
Stay Above the Fray
If you had taken a sabbatical and gone off the grid during April, you would have come back to find little change in the value of the S&P 500® Index. You missed a sharp decline, an equally sharp rebound and news headlines that might have tempted you to do the wrong thing with your portfolio.
Of course, most of us didn’t have the luxury of taking off April and unplugging from the news. However, this example helps illustrate why we always recommend taking a long-term perspective on your diversified portfolio.
What’s Driving Market Uncertainty in 2025
The Trump administration is implementing its agenda for reshaping the U.S. government, resetting trade relationships and recalibrating long-standing international alliances. Though the president telegraphed his policy intentions before taking office, volatility isn’t surprising considering the oversized ripple effect from changes in the world’s largest economy.
The challenge in this environment is remembering that uncertainty isn’t the same as a negative outcome. Rather, it means there’s a broader range of potential outcomes, and not all are bad.
Setting the Tone on Government Spending
During the earliest days of the Trump administration, the newly formed Department of Government Efficiency (DOGE) announced high-profile cuts to government departments and agencies whose activities and services most of us had taken for granted. Though the courts could block some of DOGE’s actions, the administration has sent a clear message that it will closely scrutinize discretionary government spending.
Whether these cuts will have a material impact on reducing the government’s debt and deficit isn’t clear since much of the budget is dedicated to mandatory spending on Social Security and Medicare. Budget demands for servicing the country’s record debt also loom large.
Trump’s Tariffs Are Shaping Global Markets
Trade took center stage in April when President Donald Trump invoked the International Emergency Economic Powers Act to announce his sweeping “liberation day” tariffs. These measures included what amounted to a trade embargo on China and sent markets into a sharp, but short-lived, tailspin. Just as quickly, the market rallied when the administration delayed implementing tariffs for most countries and paused the most severe tariffs on China.
Delaying the tariffs' implementation ostensibly allows the parties time to work out new trade terms. The courts are also a factor, with numerous legal challenges underway as of early June.
Regardless of how negotiations and court challenges play out, we expect the president to continue leveraging tariffs and trade policy in international negotiations.
Fiscal Spending and the 10-Year Treasury Yield
As we write this, Congress is hashing out the details of the fiscal 2025 budget. The measure aims to extend Trump’s signature 2017 tax cuts and reduce spending in other areas to fund additional new tax cuts.
Notably, the budget bill doesn’t include significant spending reductions and therefore doesn’t improve the country’s debt and deficit picture. Indeed, budget negotiations triggered significant volatility in the bond market and caused Moody’s to become the last of the three major credit rating agencies to downgrade U.S. government debt.
Despite all the noise and market gyrations, the benchmark 10-year Treasury yield was close to the same level in early June as it was a year ago and lower than at the beginning of 2025.
Focus On Your Long-Term Investment Plan
The first half of the year’s volatility and shift in market leadership again reminded us of the benefits of taking a long-term view and removing emotion from our decision-making.
After consecutive years of U.S. equities racking up gains of more than 20%, non-U.S. stocks and emerging markets have risen to the fore. We also saw bonds outperform U.S. stocks through the end of May while providing downside protection.
In this issue of Investment Outlook, our CIOs share their insights from navigating this dynamic environment. Highlights include:
Most bond yields have climbed back to their pre-financial crisis levels, highlighting fixed income's traditional role as a portfolio diversifier. Furthermore, with yields at this level, they have room to rally.
Our growth equity teams continue to see opportunities amid trade uncertainty, especially among companies involved in AI, enterprise digital transformation, cybersecurity, factory automation and drug discovery.
Europe is preparing for an upswing in demand thanks to stimulus programs to build defense capabilities and bolster infrastructure.
Among emerging markets, India appears to be in a relatively strong position to withstand the ups and downs of global trade uncertainty, due to resilient domestic consumption, easing inflation and a supportive outlook for agriculture.
Recent market activity has shown us how a properly balanced portfolio can take advantage of short-term noise. Diversification, not market timing, is the best defense against heightened uncertainty.
Thank you for entrusting your assets to us.
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 risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
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.