2025 Investment Outlook
Second Quarter
Is the Market Losing Its Appetite for Risk?
After another strong year, changes are afoot in early 2025.
We’re coming off a two-year stretch that saw risky assets perform better than many expected. This was especially true in the U.S., where a healthy economy, strong earnings growth and excitement around artificial intelligence (AI) underpinned another banner year for large growth stocks.
As a result, we entered the new year with significant valuation gaps between U.S. and non-U.S. stocks, large and small companies, and growth and value stocks. For investors, these gaps offer opportunities for diversification and balancing risk and reward in overlooked asset classes.
Market Leadership Has Shifted
The opening months of 2025 have proven to be bumpy. Stocks were in positive territory year-to-date through the end of February, but it hasn’t been a smooth ride, and there’s been a distinct rotation in market leadership.
It’s much too early to predict whether these shifts will be sustained, but so far, non-U.S. developed markets have outperformed the U.S. by a wide margin, and value stocks have outperformed their growth counterparts. Notably, U.S. stocks have lagged bonds.
Investor doubt about AI investments represents another significant shift. While enthusiasm for the technology remains strong, AI-related stocks sold off in January after the Chinese developer DeepSeek launched a cheaper AI model. The drop highlighted the high expectations priced into last year’s market leaders and their susceptibility to downturns.
Policy uncertainty is another factor affecting the market’s psyche. After years of Federal Reserve news dominating the market discussion, trade and fiscal maneuvering play more prominent roles. Again, it’s too soon to know the long-term investment implications of the second Trump administration, but we caution against making investment decisions based on expected policy outcomes.
2025 Focus: Economic and Company Fundamentals
We take our own advice when investing our clients' assets: We focus on individual securities rather than betting on the direction of policy. In this issue of Investment Outlook, our chief investment officers share their insights on navigating this environment. Highlights include:
Investors face the double-edged risk of overestimating the strength of the U.S. economy while underestimating the potential headwinds of reduced government spending.
Stock market performance could broaden with earnings growth forecasted to slow for the Magnificent Seven - seven stocks that have been high-performing in the technology sector (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla) - and accelerate for the “other 493” in the S&P 500® Index as well as mid-size and smaller companies.
We believe innovation and broader access to AI could spur earnings growth, but high valuations and the market’s narrowness have left many large companies vulnerable to volatility.
After the strong run by growth and momentum stocks, we believe investors may find opportunities in dividend-paying stocks less sensitive to market movements.
Non-U.S. stocks, including emerging markets, have lagged their U.S. counterparts in recent years. Still, we see companies benefiting from pockets of strong economic and profit growth, solid consumer spending, and the potential for a tailwind from the weakening U.S. dollar.
We think there’s potential to generate attractive yields through high-quality bonds and mortgage-backed and select commercial mortgage-backed securities.
Our CIOs have also observed that this year’s policy uncertainty and noisy headlines have prompted some investors to rush into perceived safe-haven sectors and assets such as precious metals. While investments in these areas may be appropriate as part of a diversified strategy, we think overdoing it could create unintended risks.
As always, we recommend diversifying across a broad range of asset classes to help spread risk and open portfolios to the market's broader set of opportunities.
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.