Q2 2021

Investment Outlook

Explore Our investment Outlook

Key Takeaways

  • We believe the vaccine rollout and forecasts for robust global economic growth indicate we are on the path toward normalization.
  • With inflationary pressure building, particularly in the U.S., investors should evaluate whether their portfolio strategies account for higher, although normal, rates of inflation.
  • We are overweight inflation-linked securities given our expectations for improving economic growth and easy monetary and fiscal policy to drive inflation higher.
  • The stock market’s broadening to include more cyclical stocks is positive for non-U.S., value and small-cap stocks.
  • Analysts project emerging markets earnings growth will expand to all sectors and outpace developed markets in 2021.
  • Though some growth stocks have pulled back recently, we believe investment themes such as electric and autonomous vehicles, telemedicine and faster computing and data transmission are here to stay.
  • We are underweight nominal U.S. and European government debt due to our expectations that the positive prospects for global economic growth will push yields higher.
  • While our multi-asset models call for a balanced approach in the near term, three- to five-year outlooks favor U.S. small caps and non-U.S. equities. Our longer view also favor U.S. high-yield and investment-grade corporate bonds.

We’re on the Road to Normal

Medical researchers and health organizations worldwide have made remarkable progress in preventing and treating COVID-19. The rollout of multiple effective vaccines is providing more solid footing toward normalization.

The world economy is healing as well. Aided by governments’ commitments to accommodative interest rate policies and increasingly large fiscal stimulus packages, International Monetary Fund researchers are expecting the global economy to grow a robust 5.5% in 2021.1 And, with progress in reopening the most damaged parts of the economy, corporate profits are climbing out of a deep hole with companies offering clearer outlooks for future profits.

The Opportunity Set Is Widening

The market has rewarded companies benefiting from the increased demand for cloud computing, 5G and expansion of e-commerce and digital payment services since the start of the pandemic. Investors have also gravitated to businesses tied to remote working, telemedicine and other coronavirus-related practices that are likely here to stay.

Now, a broader swath of the market is participating in these advances. Cyclical stocks are rising on expectations that improving health and economic conditions will unleash pent-up demand. Beneficiaries should include energy companies, automakers and businesses related to leisure travel. Banks could also experience a tailwind, especially if interest rates continue to rise, and losses from bad loans aren’t as extensive as originally expected. These developments are positive for value-oriented portfolios, which have historically outperformed during periods of rapid economic growth.

Smaller companies are rising, and we believe they still have room to run. Small caps have historically performed well coming out of recessions, and forecasts call for their earnings growth to outpace that of large caps this year.2 With nearly one-third of their profits derived from the housing market, U.S. small caps are also benefiting from the pandemic-related trend of households moving from urban settings to the suburbs.3

In emerging markets, analysts are projecting earnings to outperform developed markets again this year. We expect broader participation with estimates for all sectors in positive territory.4 Along with vaccine progress and stimulus, emerging markets are benefiting from the improving growth outlook and a weaker U.S. dollar.

Higher Inflationary Pressure Is on the Way

We believe investors should be evaluating their portfolios with an eye toward the potential for higher inflation. We don’t expect destructive runaway inflation reminiscent of the 1970s, but we think the U.S. Consumer Price Index will rise through the rest of the year. Don’t be surprised by periods above the 2% historical norm.

After years of unusually low inflation, we recommend our clients review how their overall investment strategies incorporate inflation management and protection.

It’s Time to Be Optimistic

After a long year, these March days with glimpses of warmer times to come seem particularly sweet. Unlike a year ago, when uncertainty was so widespread, we now see more clarity looking ahead.

Thank you for entrusting us with your assets.

1”World Economic Outlook,” International Monetary Fund, January 2021.
2FactSet, Dec. 31, 2020.
3FactSet, Standard & Poor’s and Jefferies, Dec. 31, 2020.
4FactSet, Dec. 31, 2020.

Q2 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.

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.

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