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U.S. Equity Outlook

Q1 2023

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Macro Worries Should Give Way to Long-Term Focus on Innovation and Earnings

Growth stocks endured a difficult 2022. The extent to which we face a better 2023 likely depends on whether we see peaks in inflation and interest rates and stabilization in corporate earnings growth. Regardless of near-term macroeconomic conditions, we consider this environment an opportunity to buy transformative, well-run companies at discounted prices for our portfolios.

Growth Stock Underperformance Is Historically Extreme

Growth stock underperformance has reached historically extreme levels when measured in factor terms. “Factors” describe characteristics that affect a stock’s performance, such as its size, share price momentum, valuation, earnings quality and earnings growth.

The growth factor relies on historic and projected sales and earnings growth. We consider it a cleaner measure of growth stock performance than looking at the broader growth stock indexes, whose performance can reflect many factors at once.

The current growth factor underperformance is now a two-standard deviation event, meaning it is exceedingly rare. This magnitude of underperformance has happened only six times in the last 50 years.¹ While past performance can’t guarantee future outcomes, this suggests it’s statistically unlikely that growth will perform as poorly in the future.

Macroeconomic Indicators Don’t Affect All Companies in the Same Way

Simply put, stock prices are a function of corporate earnings and the price investors are willing to pay. The story of 2022 is that rising interest rates weighed on the price, while poor economic growth resulted in disappointing earnings. Because higher rates hurt growth stocks, in particular, it follows that peaks in inflation and interest rates in 2023 could meaningfully help growth stock prices.

Meanwhile, we’ve written extensively about how earnings growth is an enduring indicator of stock performance. Although many analysts are calling for little or no earnings growth in 2023, it should be clear that changes in macroeconomic conditions don’t affect all companies equally. We think this puts a premium on identifying companies innovating and benefiting from secular growth trends with access to large and long-lived addressable markets.

We see no shortage of growth companies transforming entire industries and business practices. Just consider the tremendous innovation in health care treatments and technology, digital payments, electric vehicles and the ongoing evolution of cloud and mobile computing.

So, while we can’t tell you with certainty what growth stocks may do today or tomorrow, we have a high degree of confidence in what these companies will likely do over time. That’s why we view this environment as an opportunity to buy stocks of good businesses at attractive prices and hold them for years.

Keith Lee, CFA
Keith Lee, CFA

Co-Chief Investment Officer Global Growth Equity

Senior Portfolio Manager, Senior Vice President

Data from 12/31/1973 – 10/31/2022. Source: Barra.

Onshoring and Higher Interest Rates Present Value Opportunities

Bringing Production Back to the U.S. Supports a Manufacturing Renaissance

Reshoring and onshoring trends indicate that many businesses’ production operations are shifting from China to other nations, especially the U.S. The recent growth of foreign direct investments in U.S. manufacturing is one indicator of the trend. See Figure 1. These capital expenditures, whether foreign or domestic entities make them, boost productivity, employment and economic expansion.

Figure 1: Foreign Direct Investments in U.S. Manufacturing Have Been Surging

Foreign Direct Investments in U.S. Manufacturing Are Surging

Data from 1/1/2015 - 12/31/2021. Source: Bureau of Economic Analysis.

Companies seeking to reduce dependence on global supply chains, shrink transportation time and costs and better manage tariffs are fueling the onshoring trend. The U.S. also offers relatively low and stable energy costs, tax rates that are more in line with other nations and increasingly competitive production costs.

The onshoring trend further supports our view that economic conditions favor U.S. and non-U.S. companies with high domestic U.S. exposure. As value investors, we think companies in the industrials sector, especially electrical equipment manufacturers and distributors, may benefit.

Defensive Financials May Be Positioned to Benefit from Higher Interest Rates

We expect the Federal Reserve (Fed) to maintain higher interest rates as it continues its inflation fight in 2023. We think this is positive for financials that underearned when rates were unusually low.

Higher interest rates can lead to wider credit spreads and boost net interest income, benefiting banks, insurance firms and brokerage companies. At the same time, however, credit risk is rising as the economy slows and the recession threat grows.

Are Consumer Staples Poised for a Positive Turn?

Fast-rising input costs have pressured the profitability of companies that make everyday consumer products over the last few years. During this stretch, many have worked to make their operations more efficient. We think these efforts, along with higher prices, may help select companies to improve their financial performance in 2023.

Overall, consumer staples companies have defensive profiles and are somewhat insulated from slowing economic growth. They tend to make “must-have” products and affordable luxuries that consumers buy regardless of economic conditions.

Health Care Companies Don't Rely on a Robust Economy

We consider health care stocks to be noncyclical because demand doesn’t depend on the economy’s performance. So, even as the economy slows, we think patients seeking elective procedures after the COVID disruption could continue to benefit medical devices and service providers that are working through patient backlogs. Still, these companies face a tight labor market and rising wages.

The inelastic demand for drugs bolsters the performance of pharmaceutical and biotech companies in a recessionary market. If life-saving patented medicines are needed, people typically buy them regardless of price. Many drugs have high margins, allowing pharmaceutical companies to absorb higher costs.

Lastly, we think fears about the impact of the U.S. Inflation Reduction Act on drug company profits are unwarranted. Furthermore, these effects will occur later in the decade, giving companies time to prepare.

Kevin Toney, CFA
Kevin Toney, CFA

Chief Investment Officer — Global Value Equity

Senior Vice President, Senior Portfolio Manager

Beware the Bear Market Rally

The past year featured a pandemic, war, looming recession, malfunctioning global supply chains, inflation at 40-year highs and the Fed's aggressive rate-hiking campaign. It’s no wonder markets were so skittish.

Clients want to know if these challenges will continue to overhang markets in 2023. We think growth and inflation are likely to slow, and markets will be volatile to both the up and downsides. Under these conditions, we think investors should stick to their financial plans and not make wholesale changes.

No Economic or Market Bottom Yet

Ultimately, market direction should reflect the fundamental strength of the underlying economy — earnings growth and business opportunities are a function of economic conditions. And right now, we don’t think we’ve seen the economy or market hit bottom.

But we see the potential for short-lived bear market rallies before we establish a bottom and begin the ultimate recovery. This process isn’t unknown. Both the bursting of the dot-com bubble and the 2007-09 financial crisis featured several strong but short-lived bear market rallies. We’ve seen several bear market rallies in 2022 alone.

We believe the catalyst for these head fakes will be changing the market’s perception of Fed rate policy. By mandate, the Fed is focused on inflation and unemployment. We take this to mean the Fed is going to continue raising rates and keep them elevated until inflation cracks or joblessness surges.

But that doesn’t stop market participants from viewing every report showing a drop in inflation or higher unemployment as proof the Fed pivot is right around the corner. This explains why some of the market’s biggest up days have come in the wake of milder-than-expected inflation reports.

Two Bear Market Rally Scenarios

We see two bear-market rally scenarios for 2023 and beyond, contingent on the economic data:

  1. Slowdown rally. A real or perceived slowdown in the pace of Fed rate hikes is likely to
    spark a rally.

  2. Pause rally. The market is likely to rally when the Fed stops hiking rates because this would
    eliminate uncertainty around the end point of the cycle.

To be clear, these rallies shouldn’t be viewed as the beginning of a secular bull market. Before that could happen, we believe there’s more economic pain ahead. Only then, when the Fed cuts interest rates for the first time, are markets likely to look ahead to an enduring recovery. In the meantime, beware the head fakes and don’t deviate from your well-thought-out financial plan.

Peruvemba Satish, CFA
Peruvemba Satish, CFA

Chief Investment Officer - Disciplined Equity

Senior Vice President, Portfolio Manager, Director of Global Analytics

Q1 2023 Investment Outlook Resources

Agency mortgages

A form of securitized debt that represents ownership in pools of mortgage loans and their payments.

Asset-backed securities (ABS)

A form of securitized debt (defined below), ABS are structured like mortgage-backed securities (MBS, defined below). But instead of mortgage loans or interest in mortgage loans, the underlying assets may include such items as auto loans, home equity loans, student loans, small business loans, and credit card debt. The value of an ABS is affected by changes in the market's perception of the assets backing the security, the creditworthiness of the servicing agent for the loan pool, the originator of the loans, or the financial institution providing any credit enhancement.

BB and BBB credit rating

Securities and issuers rated AAA to BBB are considered/perceived “investment-grade”; those rated below BBB are considered/perceived non-investment-grade or more speculative.

Central bank

Entity responsible for oversight of a nation’s monetary system, including policies and interest rates.

Collateralized loan obligations (CLOs)

A form of securitized debt, typically backed by pools of corporate loans and their payments.

Commercial paper

Short-term debt issued by corporations to raise cash and to cover current expenses in anticipation of future revenues.


Commodities are raw materials or primary agricultural products that can be bought or sold on an exchange or market. Examples include grains such as corn, foods such as coffee, and metals such as copper.

Consumer Price Index (CPI)

CPI is the most commonly used statistic to measure inflation in the U.S. economy. Sometimes referred to as headline CPI, it reflects price changes from the consumer's perspective. It's a U.S. government (Bureau of Labor Statistics) index derived from detailed consumer spending information. Changes in CPI measure price changes in a market basket of consumer goods and services such as gas, food, clothing, and cars. Core CPI excludes food and energy prices, which tend to be volatile.

Corporate securities (corporate bonds and notes)

Debt instruments issued by corporations, as distinct from those issued by governments, government agencies, or municipalities. Corporate securities typically have the following features: 1) they are taxable, 2) they tend to have more credit (default) risk than government or municipal securities, so they tend to have higher yields than comparable-maturity securities in those sectors; and 3) they are traded on major exchanges, with prices published in newspapers.


Correlation measures the relationship between two investments--the higher the correlation, the more likely they are to move in the same direction for a given set of economic or market events. So if two securities are highly correlated, they will move in the same direction the vast majority of the time. Negatively correlated investments do the opposite--as one security rises, the other falls, and vice versa. No correlation means there is no relationship between the movement of two securities--the performance of one security has no bearing on the performance of the other. Correlation is an important concept for portfolio diversification--combining assets with low or negative correlations can improve risk-adjusted performance over time by providing a diversity of payouts under the same financial conditions.

Coupon interest rate

The coupon interest rate is the stated/set interest rate that is assigned to each interest-paying fixed-income security when it is issued. It is used to calculate the security's periodic interest payments to investors; the coupon rate is applied to the security's principal value to generate interest payments.

Credit quality

Credit quality reflects the financial strength of the issuer of a security, and the ability of that issuer to provide timely payment of interest and principal to investors in the issuer's securities. Common measurements of credit quality include the credit ratings provided by credit rating agencies such as Standard & Poor's and Moody's. Credit quality and credit quality perceptions are a key component of the daily market pricing of fixed-income securities, along with maturity, inflation expectations and interest rate levels.

Credit ratings

Measurements of credit quality (defined below) provided by credit rating agencies (defined below). Those provided by Standard & Poor's typically are the most widely quoted and distributed, and range from AAA (highest quality; perceived as least likely to default) down to D (in default). Securities and issuers rated AAA to BBB are considered/perceived to be "investment-grade"; those below BBB are considered/perceived to be non-investment-grade or more speculative.

Debt security

A debt instrument, including bonds, certificates of deposit or preferred stocks.


Duration is an important indicator of potential price volatility and interest rate risk in fixed income investments. It measures the price sensitivity of a fixed income investment to changes in interest rates. The longer the duration, the more a fixed income investment's price will change when interest rates change. Duration also reflects the effect caused by receiving fixed income cash flows sooner instead of later. Fixed income investments structured to potentially pay more to investors earlier (such as high-yield, mortgage, and callable securities) typically have shorter durations than those that return most of their capital at maturity (such as zero-coupon or low-yielding noncallable Treasury securities), assuming that they have similar maturities.


The eurozone is sometimes referred to as the euro area and represents the member states that participate in the economic and monetary union (EMU) with the European Union (EU). The eurozone currently consists of: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

Federal Reserve (Fed)

The Fed is the U.S. central bank, responsible for monetary policies affecting the U.S. financial system and the economy.

Floating rate

A floating rate is associated with payments that fluctuate with an underlying interest rate level, as opposed to paying fixed-rate income.

Fundamentals/fundamental analysis

Investment "fundamentals," in the context of investment analysis, are typically those factors used in determining value that are more economic (growth, interest rates, inflation, employment) and/or financial (income, expenses, assets, credit quality) in nature, as opposed to "technicals," which are based more on market price (into which fundamental factors are considered to have been "priced in"), trend, and volume factors (such as supply and demand), and momentum. Technical factors can often override fundamentals in near-term investor and market behavior, but, in theory, investments with strong fundamental supports should maintain their value and perform relatively well over long time periods.

General obligation (GO) bonds

One of the biggest sectors in the municipal securities (defined below) market. Typically, these bonds are secured by the full faith and credit pledge (defined above) of the issuer and usually supported by the issuer's taxing power (tax revenues provide the means by which most interest payments are made). GO bonds can be issued by states, counties, cities, towns and regional districts to fund a variety of public projects, including construction of and improvements to schools, highways, and water and sewer systems.

Gross domestic product

Gross domestic product (or GDP) is a measure of the total economic output in goods and services for an economy.

High-yield bonds

High-yield bonds are fixed income securities with lower credit quality and lower credit ratings. High-yield securities are those rated below BBB- by Standard & Poor's.


Inflation, sometimes referred to as headline inflation, reflects rising prices for consumer goods and services, or equivalently, a declining value of money. Core inflation excludes food and energy prices, which tend to be volatile. It is the opposite of deflation (see Deflation).

Inflation-protected securities

Debt securities that offer returns adjusted for inflation; a feature designed to eliminate the inflation risk.

Investment-grade corporate bond or credit

A debt security with a relatively low risk of default issued and sold by a corporation to investors.


Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price.

Mortgage-backed securities (MBS)

A form of securitized debt (defined below) that represents ownership in pools of mortgage loans and their payments. Most MBS are structured as "pass-throughs"--the monthly payments of principal and interest on the mortgages in the pool are collected by the financial entity that is servicing the mortgages and are "passed through" monthly to investors. The monthly and principal payments are key differences between MBS and other bonds such as Treasuries, which pay interest every six months and return the whole principal at maturity. Most MBS are issued or guaranteed by the U.S. government, a government-sponsored enterprise (GSE), or by a private lending institution.

Municipal bonds

These are long-term municipal securities (defined below) with maturities of 10 years or longer.

Municipal securities (munis)

Debt securities typically issued by or on behalf of U.S. state and local governments, their agencies or authorities to raise money for a variety of public purposes, including financing for state and local governments as well as financing for specific projects and public facilities. In addition to their specific set of issuers, the defining characteristic of munis is their tax status. The interest income earned on most munis is exempt from federal income taxes. Interest payments are also generally exempt from state taxes if the bond owner resides within the state that issued the security. The same rule applies to local taxes. Another interesting characteristic of munis: Individuals, rather than institutions, make up the largest investor base. In part because of these characteristics, munis tend to have certain performance attributes, including higher after-tax returns than other fixed income securities of comparable maturity and credit quality and low volatility relative to other fixed-income sectors. The two main types of munis are general obligation bonds (GOs) and revenue bonds. GOs are munis secured by the full faith and credit of the issuer and usually supported by the issuer's taxing power. Revenue bonds are secured by the charges tied to the use of the facilities financed by the bonds.

Net Asset Value (NAV)

The total value per share of all the underlying securities in a portfolio.

Nominal yield

For most bonds and other fixed-income securities, nominal yield is simply the yield you see listed online or in newspapers. Most nominal fixed-income yields include some extra yield, an "inflation premium," that is typically priced/added into the yields to help offset the effects of inflation (see Inflation). Real yields (see Real yield), such as those for TIPS (see TIPS), don't have the inflation premium. As a result, nominal yields are typically higher than TIPS yields and other real yields.

Non-agency commercial mortgage-backed securities (CMBS)

MBS that represent ownership in pools of commercial real estate loans used to finance the construction and improvement of income-producing properties. Non-agency CMBS are not guaranteed by the U.S. government or a government-sponsored enterprise.


Nationally recognized statistical rating organizations assign quality ratings to reflect forward-looking opinions on the creditworthiness of loan issuers.

Real estate investment trusts (REITs)

Real estate investment trusts (REITs) are securities that trade like stocks and invest in real estate through properties or mortgages.

Russell 1000® Growth Index

Measures the performance of those Russell 1000 Index companies (the 1,000 largest publicly traded U.S. companies, based on total market capitalization) with higher price-to-book ratios and higher forecasted growth values.

Russell 1000® Value Index

Measures the performance of those Russell 1000 Index companies (the 1,000 largest publicly traded U.S. companies, based on total market capitalization) with lower price-to-book ratios and lower forecasted growth values.

S&P 500® Index

The S&P 500® Index is composed of 500 selected common stocks most of which are listed on the New York Stock Exchange. It is not an investment product available for purchase.

Securitized debt

Debt resulting from the process of aggregating debt instruments into a pool of similar debts, then issuing new securities backed by the pool (securitizing the debt). Asset-backed and mortgage-backed securities (ABS and MBS, defined further above) and collateralized mortgage obligations (CMOs, defined above) are common forms of securitized debt. The credit quality (defined above) of securitized debt can vary significantly, depending on the underwriting standards of the original debt issuers, the credit quality of the issuers, economic or financial conditions that might affect payments, the existence of credit backing or guarantees, etc.

Senior-secured securities

A security that has a higher priority compared to another in the event of liquidation.

Sovereign debt

A country's own government-issued debt, priced in its native currency, that can be sold to investors in other countries to raise needed funds. For example, U.S. Treasury debt is U.S. sovereign debt, and would be referred to as sovereign debt when bought by foreign investors. Conversely, debt issued by foreign governments and priced in their currencies would be sovereign debt to U.S. investors.

Spreads (aka "interest-rate spreads", "maturity spreads," "yield spreads" or "credit spreads")

In fixed income parlance, spreads are simply measured differences or gaps that exists between two interest rates or yields that are being compared with each other. Spreads typically exist and are measured between fixed income securities of the same credit quality (defined above), but different maturities, or of the same maturity, but different credit quality. Changes in spreads typically reflect changes in relative value, with "spread widening" usually indicating relative price depreciation of the securities whose yields are increasing most, and "spread tightening" indicating relative price appreciation of the securities whose yields are declining most (or remaining relatively fixed while other yields are rising to meet them). Value-oriented investors typically seek to buy when spreads are relatively wide and sell after spreads tighten.

Spread sectors (aka "spread products," "spread securities")

In fixed income parlance, these are typically non-Treasury securities that usually trade in the fixed income markets at higher yields than same-maturity U.S. Treasury securities. The yield difference between Treasuries and non-Treasuries is called the "spread" (defined further above), hence the name "spread sectors" for non-Treasuries. These sectors--such as corporate-issued securities and mortgage-backed securities (MBS, defined above)--typically trade at higher yields (spreads) than Treasuries because they usually have relatively lower credit quality (defined above) and more credit/default risk (defined above), and/or they have more prepayment risk (defined above).


Stagflation describes slowing economic growth combined with high inflation.

Treasury inflation-protected securities (TIPS)

TIPS are a special type of U.S. Treasury security designed to address a fundamental, long-standing fixed-income market issue: that the fixed interest payments and principal values at maturity of most fixed-income securities don't adjust for inflation. TIPS interest payments and principal values do. The adjustments include upward or downward changes to both principal and coupon interest based on inflation. TIPS are inflation-indexed; that is, tied to the U.S. government's Consumer Price Index (CPI). At maturity, TIPS are guaranteed by the U.S. government to return at least their initial $1,000 principal value, or that principal value adjusted for inflation, whichever amount is greater. In addition, as their principal values are adjusted for inflation, their interest payments also adjust.

Treasury note

A treasury note is a debt security issued by the U.S. government with a fixed interest rate and maturity ranging from one to 10 years.

Treasury yield

The yield (defined below) of a Treasury security (most often refers to U.S. Treasury securities issued by the U.S. government).


A quantitative estimate of a company or asset’s value.


For bonds and other fixed-income securities, yield is a rate of return on those securities. There are several types of yields and yield calculations. "Yield to maturity" is a common calculation for fixed-income securities, which takes into account total annual interest payments, the purchase price, the redemption value, and the amount of time remaining until maturity.

Yield curve

A line graph showing the yields of fixed income securities from a single sector (such as Treasuries or municipals), but from a range of different maturities (typically three months to 30 years), at a single point in time (often at month-, quarter- or year-end). Maturities are plotted on the x-axis of the graph, and yields are plotted on the y-axis. The resulting line is a key bond market benchmark and a leading economic indicator.

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 risk considerations, including economic and political conditions, inflation rates and currency fluctuations.

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.