U.S. Equity Outlook

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Our Technology Outlook Remains Positive

Semiconductor Supply Disruptions Are Temporary

We believe higher inflationary trends will remain a risk for the next several months. In our view, however, upward pressure on inflation is transitory and related to supply chain bottlenecks that we think will resolve. For example, we see the disruption in semiconductor manufacturing as a short-term issue that caused automobile prices to spike earlier this year. We are already seeing a rebound in chip manufacturing and distribution that should allow automobile production rates to return to normal levels.

Government Support Reflects Strategic Importance of Chip Manufacturing

The U.S. and China consider expanded chip-making capacity an economic and military strategic priority. But both nations lag Taiwan and South Korea in the ability to develop the most advanced semiconductor chips. President Joe Biden’s infrastructure plan and Beijing’s Made in China 2025 initiative call for bolstering semiconductor manufacturing through significant investments in engineering and production capacity. We believe companies that supply chip manufacturing equipment should be long-term beneficiaries given market demand for semiconductors and sovereign support for their production.

Long-Term Trends Remain Intact

After outperforming for several years, tech stocks have lagged the broader stock market since the November 2020 vaccine announcements. This development heralded the opening of the global economy and set the stage for a broader swath of companies to experience earnings growth. Despite recent relative underperformance, we believe the earnings profile of most tech stocks remains robust thanks to long-lived investment themes such as cloud computing, advances in semiconductor manufacturing and 5G networks.

The easiest year-over-year “reopening” comparisons for individual companies’ key financial metrics will soon be behind us. As a result, we believe the market will return its focus to stock-specific dynamics.

Economic Reopening Trends Provide Tailwinds for Underappreciated Stocks

Leisure Travel Takes Off

Shares of cruise companies, airlines, hotels and casinos plummeted in 2020 as many feared worst-case scenarios for the travel industry. Even Warren Buffett—who espouses greediness when others are fearful—exited his positions in airlines. Though business travel continues to lag, leisure travel trends are turning positive as vaccine rollouts have encouraged people to book long-delayed vacations.

Despite the upturn, leisure-related businesses may take a couple of years to fully recover. Meanwhile, we expect travel volumes and the stocks of related companies to be volatile. We think low-cost airlines that primarily fly domestic routes could recover more quickly than their global counterparts. Coupled with a strong balance sheet, Southwest Airlines, for example, could benefit from focusing on leisure travel and U.S. routes.

Figure 1 | Sharp Uptick in Airline Passengers Bodes Well for Travel Businesses

Data as of 5/31/2021. Source: TSA.

Automakers Strive for Inventory Discipline

Low auto inventories, caused by pandemic-related factory closures, semiconductor shortages and high buyer demand, have elevated profits for car companies and their dealerships. Automakers are taking steps to preserve those positive margin and profits trends. GM, Ford Toyota and other manufacturers are considering business models that lower inventory levels at dealers to maintain margins and profitability.

Inventory discipline is the key.

For example, GM, borrowing an ecommerce strategy, intends to set up regional distribution facilities for its Bolt electric vehicle.1 These “inventory pools” keep dealers from overstocking and paying for additional floor space while automakers reduce customer wait times for desired configurations.

Millennials Are Forming Households at a Steady Pace

There are conflicting views about whether housing is a bubble about to burst. Home prices have spiked, mortgage rates have risen from historic lows and the supply of homes is anemic. On the other hand, demographic trends indicate that because their incomes are rising, millennials will provide a steady demand for housing for several years.

Builders are doing their best to add new supply, and our analysis indicates more existing homes will come to market as the year unfolds. We think the stocks of many companies in housing-related industries are fully valued now but could become underappreciated again. If that happens, we think select homebuilders, home improvement retailers and building products companies could be attractive.2,3

1Kyle Hyatt, “GM considering regional Bolt EV stock, taking inspiration from e-commerce,” Road Show, March 22, 2021.

2Ana Hernandez Kent and Lowell R. Ricketts, “Millennials Are Catching Up in Terms of Generational Wealth,” St. Louis Fed on the Economy Blog, March 30, 2021.

3Ayelet Sheffey, “3 reasons why the housing shortage will last for years, Goldman Sachs says,” Business Insider, May 19, 2021.

Expect the Market to Be More Discriminating as the Growth Rate Moderates

Business Fundamentals to Take Prominence

After a year or more in which style rotations dominated market returns from growth to value, we anticipate a renewed market focus on fundamental business strength for the remainder of 2021 and into 2022. We think this focus on individual business characteristics should provide a tailwind to moderately valued businesses that show stable fundamentals and some moderately expensive firms that demonstrate tangible near-term growth.

Figure 2 | Profit Expectations Are Approaching Pre-Pandemic Levels. Can Businesses Deliver?

3/31/2021; estimated from 2021 forward. Source: Bloomberg.

Business Quality as a Key Value Metric

We think of a company’s quality as two dimensional—the health of its balance sheet health and durability of its earnings growth. Earnings growth that reflects enduring competitive advantages is superior to growth financed through debt. During the pandemic, there was less focus on quality as a driver of stock returns. But the COVID vaccine, global economic reopening and stimulus were a tide that “lifted all boats,” arguably resetting the corporate earnings landscape. As a result, we expect the market to be more discriminating going forward, rewarding tangible fundamental growth.

The Question Isn’t Growth Versus Value, It’s Profitable Versus Unprofitable

We expect rising interest rates and inflation to have greater impacts for long-duration assets, including many expensive growth equities. 

As a result, we believe the market will begin to favor businesses that can demonstrate tangible short-term growth and penalize businesses that lack clear lines of sight to profitability.

Think of it like this slight rephrasing of the proverb, “A bird in the hand is worth (more) than two in the bush.” Cash flows are now worth more than cash flows in the future, and that’s especially true if inflation and interest rates rise. So, rather than focusing on style or sector dominating performance potential going forward, we believe a focus on near-term profitability is key to uncovering investment opportunities. And given concerns about inflation, we’ll look for margin sustainability and pricing power as key elements in our security selection process.

Q3 2021 Investment Outlook Resources

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.

Alternative mutual funds that hold a variety of non-traditional investments also often employ more complex trading strategies than traditional mutual funds. Each of these different alternative asset classes and investment strategies have unique risks making them more suitable for investors with an above average tolerance for risk.

Diversification does not assure a profit nor does it protect against loss of principal.

Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.

Mutual fund investing involves market risk. Investment return and fund share value will fluctuate. It is possible to lose money by investing in mutual funds.

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.

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