2025 U.S. Equity Outlook
Third Quarter
Key Takeaways
Growth Stocks: Caution is necessary due to high uncertainty and decreasing earnings expectations. However, we are finding opportunities among companies whose earnings are less dependent on the economic cycle.
Value Stocks: Health care stocks have had an up-and-down year. Some causes of the health care sector’s underperformance may be overstated and may not even happen, creating a potential opportunity for patient investors.
Growth Stocks
Cautious, but Finding Opportunities
The months following President Donald Trump’s “liberation day” tariff announcement have reminded us that the economy and markets are dynamic and continuously evolving. Stocks fell 12% in the wake of the announcement, but recovered these losses the following month after a 90-day pause in most tariffs. Similarly, economists initially increased the likelihood of a recession but later revised their forecasts downward as the tariff news evolved.
Whiplash? Short-termism? Four-dimensional chess? No matter how you characterize it, this dramatic market volatility reflects the policy uncertainty confronting investors on a headline-by-headline and tweet-by-tweet basis.
Large Growth Companies Have Historically Offered Growth Amid Uncertainty
Growth-oriented companies, whose earnings have tended to be more durable and less dependent on the economic cycle, have been relatively more attractive during economic uncertainty.
That’s never been truer than now. Amid the volatility, we are finding opportunities in companies benefiting from lasting trends such as artificial intelligence (AI), enterprise digital transformation, cybersecurity, factory automation and drug discovery.
Economic Trends Support Growth Stocks
Another positive development is that inflation has eased in 2025. Growth stocks are typically sensitive to changes in inflation and interest rates, so the progress toward price stability benefits this asset class. The employment picture is also healthy, with data indicating that wage inflation is cooling.
Moderating inflation and a stable job market would allow the Federal Reserve (Fed) to lower interest rates in 2025 and 2026. Based on futures contracts, the bond market is pricing in half a percentage point (50 basis points) in interest rate cuts for 2025 and 2026. By the end of 2026, this would result in a Fed funds rate in the range of 3.25% to 3.5%, down from the current range of 4.25% to 4.5%.
This would align with the Fed’s “dot plot” forecast, which predicts the same ending levels for 2025 and 2026. Lower interest rates tend to disproportionately benefit growth stocks compared to value stocks.
Volatility May Persist for U.S. Equities
However, our outlook has some real caveats. Given trade policy and economic growth uncertainties, many corporate management teams have either withdrawn or reduced their future earnings guidance.
As a result, corporate earnings estimates have declined since last quarter. However, earnings estimates for the large-cap Russell 1000® Growth Index have held up better than those for the broader S&P 500® Index.
Another critical point is that valuations aren’t as attractive as they were at the end of the first quarter. This reflects a less robust earnings outlook and the market rebound of the last month or so. The valuation gap between growth- and value-oriented stocks has narrowed meaningfully since its 2023-2024 peak and is now about as narrow as it has been in the last five years.
Similarly, based on forward earnings forecasts over the last five years, we believe the Russell 1000® Growth is attractive compared to the S&P 500. Of course, all these statements assume companies hit those revised earnings targets.
Supply Chain Flexibility Can Help Mitigate Tariff Impacts
When considering our portfolio companies, we believe supply chain management and flexibility will be essential to navigating tariff uncertainty. If tariffs are consistently applied over time, they could pressure profit margins and contribute to higher inflation. In that environment, we feel companies with strong pricing power would be particularly attractive.
Competitive advantage is another key characteristic that makes a stock attractive now. Blanket tariffs will impact every company in an industry or sector, but the level and manner of that impact will differ among companies.
Imagine being caught in a storm. Everyone will get wet, but those without proper rain gear will be soaked, while others will remain relatively dry under their umbrellas and raincoats.
That’s why when we choose to invest in a company, it’s because we believe deeply in its management team, competitive position and value proposition over time.
We don’t expect economic, market or policy uncertainty to resolve anytime soon, so we think you should prepare for more volatility. We’re not arguing that growth stocks will be immune to market volatility, but we believe they are relatively better positioned over time than value stocks and the broader market.
Value Stocks
Diagnosing Risks in the Health Care Sector
As value investors, we’re particularly keen on a selection of stocks we own in the health care sector.
Our health care holdings fit our process because they are largely under-earning and trade at attractive valuations. Historically, they have been less susceptible to macroeconomic conditions.
But not these days.
The health care landscape is pockmarked with risks and uncertainties ranging from tariffs to funding cuts afflicting various government programs to potential regulatory changes.
Yet, we remain overweight in health care stocks in our value portfolios. Recent pressures have led to more favorable valuations in the sector, which we believe benefits the patient investor. We also think some risks may be overstated or could be managed, if they come to pass at all.
How Drug Price Policies Can Affect Pharma Stocks
In 2025, pharmaceutical stocks like Johnson & Johnson have declined through May 21. That’s partly due to the Trump administration's moves to reduce drug prices.
President Donald Trump signed an executive order on May 12 that would index the amount government programs pay for prescription drugs to list prices in countries that have adopted price controls.
It’s unclear whether the White House could implement the executive order without congressional approval. Given the pharmaceutical industry's and its lobbyists' sway with lawmakers, we don't think Congress would approve drug price caps.
While the pharmaceutical industry faces headwinds, associated sectors have performed well. Drug distributors like McKesson and Cardinal Health have been brighter areas of the health care sector, given their relative lack of exposure to regulations, pricing concerns and funding cuts.
Health Care Sector Risks from Federal Budget Reductions
The Trump administration’s top priorities in 2025 include passing a tax bill extending the 2017 tax cuts from his first term. Given the mounting concerns about the federal government’s fiscal situation, lawmakers have eyed cuts to Medicaid spending as one way to limit growing deficits.
Medicaid cuts could spell problems for hospitals if the final legislation involves significant changes to reimbursement formulas. If hospital systems had to reduce their capital spending, that would have downstream impacts on other areas of health care, such as medical technology companies like GE Healthcare.
So far, we haven’t observed this in the tax bill proposals that have advanced in Congress. The version of Trump’s “big, beautiful bill,” which passed the House by a single vote on May 22, included fewer negative impacts on Medicaid than we initially expected by avoiding reductions in supplemental payments and provider taxes.
Spending cuts elsewhere threaten certain health care stocks. Some $2.4 billion in grants from the National Institutes of Health (NIH) have been frozen or canceled through April.
Becton Dickinson suffered one of its worst one-day losses in May after the medical device and technology company disclosed that cuts to research funding from the NIH and elsewhere would affect sales of its research instruments.
Similar impacts extend to the broader life sciences industry as lower demand for instruments weighs on pricing. Contract research organizations that conduct clinical trials also face headwinds as pharmaceutical companies reduce their research and development budgets.
Clinical laboratories, however, are more insulated from the pressures of changing regulations and funding cuts. Companies like Quest Diagnostics and Labcorp have been among the sector’s stronger performers.
Medical Stocks Face Tariff Headwinds
Medical technology companies have endured a long stretch of disruption, starting with the COVID-19 pandemic.
Now, these global businesses must tackle tariff pressures. The U.S.-China trade war presents headwinds to companies like Becton Dickinson that sell to China and have manufacturing footprints there. Given hospital systems' large group purchasing habits, these companies are more restricted in their ability to increase their pricing. In light of these tariff impacts, Becton Dickinson lowered its profit forecast for 2025 in May.
We see more positive developments beneath the choppy currents of today’s market environment for medical technology companies. Utilization is high, there are product drivers that can help improve margins and the industry is largely unaffected by regulatory changes.
Finding Value Opportunities in a Volatile Health Care Sector
It’s hard to remember a more uncertain time for health care stocks outside of a pandemic. Each new day seems to bring additional troubling developments. For instance, managed care organizations learned late in May that they would face particularly aggressive regulatory audits.
While risks abound in health care, valuations are at an all-time low. While some of these risks are real, others can be managed, and many may not result in the worst-case scenarios that the market has priced in.
Given that demand remains steady and other fundamentals have held up, we believe this environment presents an opportunity rather than a blinking sign for the health care sector's exit.
Explore Our Global Growth and Global Value Capabilities
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.