U.S. Equity Outlook

Explore Our investment Outlook

Working Through the Growth Stock Sell-Off

Undeniable Near-Term Challenges for Growth Stocks Create Opportunity

We’re in an undeniably difficult period for growth equities, where inflation and interest rates are rising even as economic growth appears to be slowing. Under these conditions, we continue to believe there are attractive opportunities for patient, long-term investors.

Focusing on Companies Able to Finance Their Own Growth

We’re taking steps to address our portfolio positioning. First, fundamental research remains our core competitive strength and primary value proposition. Our visits to companies focus on understanding the opportunities available to corporate management. These discussions are crucial to understanding how firms may adjust their priorities if their cost of capital continues to rise, or the economy goes into recession.

We also scrutinize regulatory filings to help ensure we have a comprehensive understanding of a company’s risks, particularly its financial position. That’s essential because rising interest rates and falling equity markets have made debt and equity financing more expensive. With this backdrop, we are assessing whether businesses have sound balance sheets and adequate capital to fund their growth ambitions.

In addition, we are actively analyzing and stress testing the downside risk. We know growth stocks could be vulnerable to further downside volatility and prepare for that possibility. While we believe select companies remain undervalued when considering their long-term business prospects, we will adjust our position size when we believe the risk of capital loss is disproportionately high, particularly in the case of companies with negative free cash flow or “cash burn.”

Swinging at Good Pitches

As growth investors, our goal is to own companies we believe are positioned to emerge stronger from this cycle due to their healthy balance sheets and adequate capital to fund growth. Without doubt, corrections are painful in the short run. But we believe sell-offs offer an opportunity to own more attractively priced companies benefiting from compelling growth potential.

Companies With Pricing Power May Offer Solace to Anxious Investors

Passing Through Higher Costs Is Key to Company Performance

Of all the macro concerns spurring market volatility this year, the steep increase in inflation may pose the biggest challenge for corporate management teams. It can be difficult to pass through higher costs without hurting demand, even for companies with strong competitive positions, powerhouse brands and loyal customers.

Inflation began climbing more than a year ago. This has made evaluating a company’s ability to pass along rising costs vital to our fundamental analysis. We think companies with pricing power may be well-positioned to survive inflation’s effects and potentially rise above them.

Consumer Staples Companies Hold Considerable Pricing Power

Accounting for roughly 70% of the country’s economic activity, consumers are the lynchpin for determining whether the U.S. can avoid recession. Despite many concerns overhanging the economy, unemployment is near all-time lows, and consumers have proven resilient with healthy bank accounts.

Still, we’re starting to see some cracks. The recently completed earnings reporting season revealed shifts in consumer spending habits. Due to higher prices for gas and food, retailers are reporting that shoppers are proportionally spending more on lower-margin food items and less on higher-margin clothing and discretionary goods.

With pandemic trends leading many people to resume venturing outside their homes, some multiline retailers have overstocks of “stay-at-home” items such as TVs and furniture. This shift is a lesser consequence for companies that make the products consumers depend on daily and frequently purchase regardless of the economic cycle.

Durable brands, leading market shares and strong balance sheets are hallmarks of large companies like Procter & Gamble, Conagra, Hershey’s and Mondelez. We think some companies with attractive assets are undervalued and underearning their normalized potential.

Auto Insurance Companies Are Raising Rates as Traffic Volumes Surge

When the pandemic began, many policyholders drove less and accident claims fell dramatically, reducing insurance companies’ operating costs. See Figure 1. Most insurers provided some relief to their policyholders through refunds or reduced rates.

Americans have since returned to the roads, increasing the number and severity of accidents. Auto claims costs have risen due to higher labor and materials costs and supply chain-related issues. State regulators are granting rate increases to many insurers. Higher rates help companies recoup the higher loss costs and restore profitability to normal levels.

Figure 1 | On the Road Again — People Are Back to Driving

Moving 12-Month Total Vehicle Miles Traveled

Data as of 3/31/2022. Source: U.S. Federal Highway Administration, Federal Reserve Bank of St. Louis.

But Hospitals Are Inflation-Challenged

The inflationary environment continues to challenge the operators of hospitals, outpatient clinics and long-term care centers. Staffing shortages, overtime and the costs of “traveler nurses” have pushed up payroll burdens.

Payer reimbursement rates are not keeping pace with inflation, forcing many hospitals to trim services to maintain profitability. Hospitals seek price increases, but health insurers and employers are pushing back. These trends will likely continue for the foreseeable future and strain many operators’ budgets.

Q3 2022 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.

No offer of any security is made hereby. This material is provided for informational purposes only and does not constitute a recommendation of any investment strategy or product described herein. This material is directed to professional/institutional clients only and should not be relied upon by retail investors or the public. The content of this document has not been reviewed by any regulatory authority.