2025 U.S. Equity Outlook
First Quarter
Key Takeaways
We see opportunities in innovative companies leading long-term trends like artificial intelligence, factory automation and drug discovery.
The impacts of China’s struggling property market and weak consumer demand are spreading to global stocks.
Growth Stocks
Why Long-Term Investment Trends Matter More Than Political Changes
After the U.S. election, clients have asked us two main questions. What’s the likely effect of Trump's policies on markets? And what does the election mean for the 2025 outlook?
While we’re mindful of economic and political conditions, they aren’t central to our investment strategy. We don’t think they should be the primary factor in your decision-making either. This might seem surprising because electoral outcomes can feel monumentally important, and economic cycles impact everyone.
But when it comes to investing, we’re trying to compound wealth for our shareholders over the long term. We’re trying to identify next decade’s winners, so we look beyond economic and electoral cycles. In other words, we focus on long-term fundamentals rather than short-term policy changes.
Take Amazon as an example. It’s among the largest retailers in the world, so economic cycles affect its results. However, regardless of the economy, we believe the company has competitive advantages compared to other retailers. This is to say nothing of its cloud computing and artificial intelligence (AI) business units, which we believe offer tremendous value.
That’s why our North Star has always been to own what we believe are great businesses — those producing superior profitability and growth — with long runways of opportunity. As a result, we're not doing anything differently today than we did before November 5.
How Earnings and Interest Rates Will Shape the Market in 2025
We remain concerned about interest rates and corporate earnings growth in the broader market and economy. Stock valuations are expensive based on what we believe are aggressive 2025 earnings expectations. With stocks at record highs, you should expect volatility if corporate America fails to hit these lofty targets.
On monetary policy, the good news is that inflation has fallen significantly from its 2022 peak, allowing the Federal Reserve (Fed) to begin cutting interest rates. Lower rates reduce borrowing costs and make spending easier for consumers and companies to fund expansion plans. What’s less clear is how low rates can go.
The Fed’s “dot plot” forecast suggests its short-term rate target will reach 3.25% to 3.5% by year-end 2025. However, the bond market is skeptical, pricing in a rate between 3.75% and 4.0%. All else equal, the stock market would prefer lower rates. As a result, a less accommodating Fed would be another risk to stocks.
Harnessing Innovation for Increased Productivity and Profits
We see tremendous opportunity in companies innovating and disrupting large addressable markets, regardless of economic and policy outcomes. Long-term trends such as AI evolution and adoption, enterprise digital transformation, cybersecurity, factory automation and drug discovery are examples of meaningful opportunities for shareholders.
AI is likely the biggest long-term growth trend, which we’ve explored over the past two years in our Exploring AI series. We’ve consistently argued that we’re still in the early stages of an AI revolution, with opportunities and impacts touching nearly every sector of the economy. Currently, much of the focus is on the chips themselves. However, the infrastructure needed to develop this technology has significant implications for data centers, power demand and the need for energy-efficient chips and cooling technology.
Factory automation is another long-running secular trend. These stocks have recently been volatile due to an industrial slowdown in the U.S. over the last year. However, we focus on companies that can innovate and strengthen their competitive positions over multiple economic cycles, not just in the short term. This trend has wide-reaching benefits, not only for the companies automating their processes but also for the robotics companies and parts suppliers that support this progress.
We're also in a period of remarkable health care innovation. Drug companies are identifying new approaches to treating diseases, making this segment a major secular driver of growth. Robotic surgery and medical device companies are making massive strides in providing more effective tools and procedures, resulting in better outcomes and fewer patient complications. Other companies are evolving to meet the demand for more cost-effective, accessible care.
These are just a handful of examples of areas where we find quality companies capable of maintaining strong growth over long periods. We hope it’s clear now why we want to invest in these companies, regardless of which party controls Washington, D.C., or whether the economy is expanding or shrinking.
Value Stocks
Navigating the Global Impact of China’s Economic Weakness
The U.S. economy remains sturdy and resilient by several measures.
But the strong U.S. tide isn’t lifting all boats. As value investors, we keep seeing weakness in the Chinese economy seeping into other global stocks.
China’s real estate market has collapsed due to years of excessive speculative building. As a result, housing sales in China have almost stopped, causing ripple effects worldwide.
The average Chinese consumer has 70% of their wealth tied up in real estate assets, so consumption has slowed. Companies selling luxury goods are finding fewer buyers in China, as evidenced by L’Oreal’s recent report of declining sales there.
A.O. Smith, an American manufacturer of water heaters, reports that sales to China have dwindled. Chinese sales for Fortune Brands Innovations, a U.S. home products company whose brands include Moen and Riobel, have also slumped.
Elevator manufacturer KONE’s sales in China are down 20%, owing to the slackening pace of new construction.
Even while China's consumption, construction and other economic activities are slowing, the country is still producing industrial materials and products. If it can’t use or sell those products domestically, China sends them elsewhere, which affects the global economy.
China produces about half of the world’s steel. With lower demand due to slowing construction, China is exporting steel in ever greater numbers. China exported 92.3 million metric tons of steel, a 39% increase from 2022.1 That depressed worldwide steel prices and resulted in U.S. tariffs on Chinese steel and other anti-dumping measures in markets like Japan and South Korea.2
Similarly, China is flooding foreign markets — particularly Europe — with electric vehicles that its domestic manufacturers continue producing.
Changes in China’s health care policies are also impacting global stocks. In 2019, China adopted a volume-based procurement (VBP) program by which the government buys large amounts of medical supplies from the companies offering the lowest prices, thereby lowering health care costs through bulk buying power.
Companies that win the business have access to high volumes of patients but usually at lower prices than they could fetch for the same products in other markets.
Johnson & Johnson cited the VBP policy as one reason for the weakness in its medical device business this year.3 Medtronic also reported lower prices for coronary stents sold through the program.4
China’s weak economy will continue to challenge the global stock market. It’s uncertain whether President-elect Donald Trump will follow through on his promise to impose 60% tariffs on Chinese goods. If he does, the effects will be unpredictable.
We will also monitor whether China's wide-ranging government stimulus plans will boost its economy or further slow it down.
Financials Sector in 2025: Shifting Fortunes and New Prospects
In an increasingly uncertain world, few things provide greater clarity than election results. The winners assume power, and the losers go home.
Election results can also sort out winners and losers in equity markets. For example, Trump’s victory may dim the prospects for companies tied to renewable energy. At the same time, his winning may support a comeback for stocks in the challenged financials sector.
The failure of four banks in 2023 resulted in new banking regulations. Elevated interest rates meant banks had to pay more for deposits. These developments cut into bank margins.
Banks have rallied since Trump’s win. Bankers believe he may roll back the 2023 regulations, which include more stringent capital requirements. In addition, Trump-appointed officials will shape the Basel III Endgame, the final set of international banking regulations enacted after the Great Financial Crisis. These regulations cover capital rules, liquidity proposals and long-term debt rules.
There’s speculation that a Trump administration could loosen the federal government’s grip on mergers and acquisitions. The Biden administration was among the toughest in modern history on corporate dealmaking. Bank mergers took 42% longer to close under the Biden administration than during the first Trump presidency.5
While Trump may not take a hands-off approach to all corporate mergers — his first term showed he was willing to scrutinize technology deals — he might be more lenient with bank mergers.
¹U.S. Department of Commerce, International Trade Administration, “China Steel Exports Report.”
²Annie Lee, “Japan, South Korea Eye Anti-Dumping Action on China Steel Goods,” Bloomberg, September 26, 2024.
³Ricky Zipp, “J&J Medtech Fails to Meet Growth Expectations,” Medtech Dive, July 17, 2024.
⁴Grace Xie and Li Fern Woo, “How to Cope with the Volume-Based Procurement Policy on High-Value Medical Device? (Tax Considerations),” KPMG, 2021.
⁵Keefe, Bruyette & Woods, “The KBW Bank Brief — Deal Closings: Isolating the Political and Regulatory Angle,” August 18, 2024.
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.
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.