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We're Focusing on the Enduring Case for Quality Growth Stocks

We believe market volatility will remain high in 2023. The year-opening rally in stocks seems to have been based on the notion that inflation is falling and therefore the Federal Reserve (Fed) must be nearly finished raising interest rates. But, of course, to investors’ detriment, the market consistently underestimated both inflation and the Fed last year.

We can also point to stress in the banking system and the slowing pace of economic and corporate earnings growth as reasons to believe markets may face a bumpy road ahead. Geopolitical risks are also heightened, with the war in Ukraine continuing to have serious implications for energy markets. Tensions between China and the U.S. are further straining semiconductor production and global supply chains. Finally, the global trend toward nationalism/deglobalization will likely lead to lower economic productivity, which is a likely long-term drag on growth.

In this environment, we expect an uncertain and volatile year.

Heightened Volatility Creates Opportunities

We believe near-term uncertainty presents attractive opportunities to investors willing to be patient with companies positioned to innovate and sustain growth over time. Indeed, we can point to the continuation and expansion of powerful, long-term secular growth trends, including:

  1. Corporate investments that bolster business continuity.

  2. Government support for investments in renewable energy, infrastructure and manufacturing.

  3. A more flexible and distributed remote work model that expands the labor pool.

  4. Ongoing enterprise digital transformation that drives productivity.

  5. A healthy financial sector that provides a capital buffer and support.

  6. Ongoing innovation in the technology, financial, health care, consumer and industrial sectors.

We remain confident in our belief that well-run, high-quality companies with a capability for sustained long-term growth can outperform over time, despite short-term volatility.

Keith Lee, CFA
Keith Lee, CFA

Co-Chief Investment Officer Global Growth Equity

Senior Portfolio Manager, Senior Vice President

Bank Crisis Could Have Lingering Effects

The dust is far from settled, but we think the repercussions of the recent U.S. regional bank failures could play out for months or longer. The U.S. Treasury, Federal Reserve (Fed) and Federal Deposit Insurance Corp. (FDIC) stepped in quickly to help restore confidence in the banking system. Still, faith can be fleeting for jittery bank customers and investors.

The FDIC guaranteeing all deposits at the failed banks should lower the risk of contagion in the short term. Even so, many banks will continue to have outflows as customers move cash out of traditional accounts into higher-yielding vehicles elsewhere. Banks are also under pressure industrywide from losses on their investment portfolios due to rapidly rising interest rates.

Failed Banks Succumbed to Company-Specific Problems

It’s important to remember that the troubled banks have been experiencing company-specific problems. For example, Silicon Valley Bank’s (SVB’s) heavy exposure to tech-oriented venture capital assets is unique. Meanwhile, Silvergate Capital and Signature Bank had somewhat unusual exposure to the crypto industry. Most other regional banks don’t have comparable industry concentration risks.

SVB’s large average account size also stands out. Approximately 90% of the bank’s deposits exceeded the FDIC’s $250,000 coverage. The regional banks we hold tend to have a higher mix of insured deposits. Unlike the large account holders who pulled their money out of SVB, we believe the owners of smaller insured accounts are less likely to move their deposits.

We’re Monitoring Risk and Watching for Opportunities

Our investment teams are closely monitoring the banks we hold in our portfolios to determine if they’re experiencing liquidity challenges. We’re also attempting to gauge capital levels, determine insured deposit levels and assess pricing pressure they may be feeling on deposit accounts.

In addition, we’re actively adjusting portfolio holdings to reflect the evolving conditions. We’re open to adding or increasing positions in banks that we believe the market has unduly punished. They must meet our quality requirements, including having sustainable returns from diversified sources, strong capital and liquidity ratios, and solid management teams.

Expect New Banking Regulations

We believe more regulation of small- and mid-sized regional banks is a likely outcome of this crisis. In our view, applying a tailored version of large-cap bank liquidity requirements to smaller institutions would be logical. Such reforms could eat into the profitability of mid- and small-cap banks, but the changes may be inevitable. The details of any legislation or regulatory action are yet to be determined, so there is a wide range of potential long-term cost outcomes.

Kevin Toney, CFA
Kevin Toney, CFA

Chief Investment Officer — Global Value Equity

Senior Vice President, Senior Portfolio Manager

Is an Earnings Recession on the Horizon?

With the Fed nearing the end of its rate hiking cycle, we expect equity investors to turn their focus to the health of corporate earnings. Unfortunately, they’re shifting their attention at the same time our analysis suggests an earnings recession is on the horizon.

Earnings Are Vulnerable After Surging in Recent Years

Corporate earnings jumped dramatically from 2021 through mid-2022, benefiting from the 40-year high in inflation. At that time, companies raised prices amid supply chain disruptions caused by the pandemic and war in Ukraine. As a result, corporate profits grew much faster than inflation.

Strong consumer spending and monetary and fiscal stimulus coming out of the pandemic helped fuel profit growth. While these conditions aided the economic recovery, they also resulted in prices rising faster than wages. We don’t think it’s a coincidence that faster inflation and slower wage growth occurred around the same time that corporate earnings soared.

It’s a Tough Environment for Earnings Growth

Current conditions are essentially the opposite of the environment that supported the rapid rise in profits, and they suggest a much more challenging outlook for profit growth in 2023. With the decades-low unemployment rate, wage growth could well exceed inflation going forward.

Also, consider that corporate earnings have run far ahead of historical norms. Specifically, earnings have moved higher in a remarkably narrow band since the 2008 Great Financial Crisis. See Figure 1. At the end of February, earnings were about 23% above this historical, long-term band. If we account for the effects of inflation, “real” corporate earnings are still around 18% above trend. This means that even if the Fed managed to shave inflation to 3%, earnings would still have to shrink by 15% to return to this long-term band.

Figure 1 | Corporate Earnings Are Still Well Above Historical Norms
Corporate Earnings Are Still Well Above Historical Norms.

Data from 12/11/1992 – 3/7/2023. Source: FactSet. Gray lines represent the typical range of EPS throughout the entire period.

To be clear, we aren’t forecasting a 15% decline in corporate earnings for 2023. But depending on the level of inflation, earnings will have to fall to some degree to return to “normal.” To highlight the disconnect between where we are and where we may be headed, we’re seeing more analysis that indicates Wall Street expects corporate earnings to be unchanged year over year.

Falling Earnings Suggest a Rough 2023 for Stocks

We’ve made our case for why we believe corporate earnings are going to fall in 2023, and perhaps by a larger margin than many analysts currently expect. And yet, in the fourth quarter of 2022 and into the early months of 2023, stocks rallied sharply.

Interestingly, the S&P 500 price-to-earnings (P/E) ratio at the end of February was just below 20. That’s roughly in line with where stocks traded in the decade before the pandemic. We just don’t believe a market rally is consistent with where P/Es are and our outlook for corporate earnings.

Peruvemba Satish, CFA
Peruvemba Satish, CFA

Chief Investment Officer - Disciplined Equity

Senior Vice President, Portfolio Manager, Director of Global Analytics

Q2 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.


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.

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.

Earnings per share (EPS)

The portion of a company's profits allocated to each outstanding share of its common stock. It is as an indicator of a company's profitability.


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 funds rate (aka fed funds rate)

The federal funds rate is an overnight interest rate banks charge each other for loans. More specifically, it's the interest rate charged by banks with excess reserves at a Federal Reserve district bank to banks needing overnight loans to meet reserve requirements. It's an interest rate that's mentioned frequently within the context of the Federal Reserve's interest rate policies. The Federal Reserve's Open Market Committee (defined below) sets a target for the federal funds rate (which is a key benchmark for all short-term interest rates, especially in the money markets), which it then supports/strives for with its open market operations (buying or selling government securities).

Federal Reserve (Fed)

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

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.

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.

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.

Price to earnings ratio (P/E)

The price of a stock divided by its annual earnings per share. These earnings can be historical (the most recent 12 months) or forward-looking (an estimate of the next 12 months). A P/E ratio allows analysts to compare stocks on the basis of how much an investor is paying (in terms of price) for a dollar of recent or expected earnings. Higher P/E ratios imply that a stock's earnings are valued more highly, usually on the basis of higher expected earnings growth in the future or higher quality of earnings.


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® Growth Index

A style-concentrated index designed to track the performance of stocks that exhibit the strongest growth characteristics by using a style-attractiveness weighting scheme.

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.

S&P 500® Value Index

The S&P 500 Value Index is a style-concentrated index that measures stocks in the S&P 500 using three factors: the ratios of book value, earnings, and sales to price. 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.

Subordinated security

An unsecured loan or bond that ranks below more senior loans in terms of claims on assets or earnings.

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.