SHIFTS THAT COULD SHAPE Q4 MARKET BEHAVIOR

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Oct 02, 2025, 09:41 ET

American Century's chief investment officers offer insights in quarterly investment outlook

KANSAS CITY, Mo., Oct. 2, 2025 /PRNewswire/ -- Following last week's first interest rate cut in 2025, chief investment officers (CIOs) from American Century Investments – the global asset manager that recently surpassed $300 billion* in assets under management for the first time in its more than 65-year history – emphasize the importance of diversification and maintaining a long-term perspective in the firm's quarterly investment outlook released today. American Century's experts expect market behavior and investment strategies will be shaped by several emerging themes:

concerns about interest rates,
inflationary pressures,
U.S. debt,
market concentration,
opportunities in non-U.S. equities and small caps.

These themes point to the need for diversification and a long-term view that has never been more critical.

Interest rates and the Federal Reserve's approach

The Federal Reserve's (Fed's) stance on interest rates continues to be a focal point for investors. While some anticipate aggressive rate cuts, American Century's CIOs urge caution.

"The market appears to be betting on the Fed making a series of aggressive moves," said Keith Lee, co-chief investment officer of global growth equity for American Century. Calling these reasonable expectations, Lee still advised: "It's important to remember the central bank has a dual mandate of maintaining full employment and price stability. These two goals appear to be at odds with each other."

Charles Tan, chief investment officer of fixed income for American Century, also expects the Fed to retain an easing bias and engage in a slow, low-conviction rate-cut cycle.

"The low-volatility macroeconomic environment and intermittent Fed policy support should keep financial conditions relatively easy. In our view, lower job creation isn't necessarily a reason to worry. The labor supply is declining, but so is the demand for labor. This means balance is returning to the labor market," said Tan.

Regardless of what future Fed decisions are, Lee emphasized the importance of long-term planning over short-term speculation.

"The pace and size of the Fed's rate cuts in the near term aren't the variables that will determine long-term investing success. Instead, the most important thing you can do is develop a financial plan consistent with your needs, risk tolerances and time horizon. Then, you need to stick to it," said Lee. "As an investor, time horizon matters greatly, and sticking to your long-term saving and investing plan beats reacting to short-term noise."

Inflationary pressures and expectations

Inflation remains a complex issue, influenced by both monetary and fiscal policies. Tan anticipated future inflationary pressures driven primarily by tax and spending changes, rather than tariffs.

"Our view on the effects of tariffs differs from broad market sentiment. Specifically, we don't expect tariff-related price adjustments to be persistent sources of inflation, whereas the market does Meanwhile, if the Fed embarks on an aggressive rate-cut campaign, inflationary pressures could become even stronger," said Tan.

Concerns about the level of U.S. debt

The growing U.S. debt and budget deficit are raising alarms among economists and investors. Rich Weiss, chief investment officer of multi-asset strategies for American Century, raised concerns about the growing U.S. debt and budget deficit, outlining a trifecta of potential consequences.

"The U.S. debt and budget deficit are alarmingly high and we don't believe we can continue on this course indefinitely without something going awry. This could be higher interest rates, downgrades to the U.S. credit rating, a weaker currency, or likely all three," said Weiss. "However, we don't anticipate an acute crisis."

He referenced Ferguson's Law to underscore the gravity of the situation.

"There's a lesser-known economic principle called 'Ferguson's Law,' which suggests that any great power that spends more on servicing its debt than on its defense risks losing its status as a great power. In 2024, the U.S. began to violate Ferguson's Law for the first time in nearly a century," said Rich Weiss.

Market concentration leads to "bad breadth"

Market concentration, particularly the dominance of a few large-cap stocks, is another concern for Weiss.

"Technology stocks, combined with the four non-tech Mag 7¹, now capture over 45% of the S&P 500 ® Index. Meanwhile, the index represents about 80% of the total U.S. stock market. This means the 'tech plus 4' returns drive overall market returns and the price-earnings multiple², even though the number of stocks involved is only 14% to 15% of the S&P 500. This heavy concentration, or lack of market breadth — also known as 'bad breadth' — is concerning," said Weiss. "We're not saying the recent trend of concentrated performance will reverse soon, but it doesn't look sustainable."

Opportunities in non-U.S. equities and small caps

Despite these challenges, opportunities abound in non-U.S. equities and small-caps. Victor Zhang, chief investment officer of American Century, noted non-U.S. and emerging markets "have outperformed U.S. stocks, breaking a long-standing trend of U.S. market dominance."

This reversal may be meaningful rather than a fluke, with Kevin Toney, chief investment officer of global value equity for American Century, pointing to history.

"History indicates that periods of outperformance by either non-U.S. and U.S. equities can last for years. This year could be the early days of a new era — however long — in which non-U.S. stocks carry the torch," said Toney.

Small-cap stocks have also gained traction, with Zhang noting their outperformance compared to large-caps since midyear. Weiss points to the potential for increased merger and acquisition activity further benefiting small-caps.

"We think there's an argument to be made that small-caps may receive more attention in the future. First, M&A activity might increase. Deal flow has been slow mainly because uncertainty from constantly changing tariff policies has caused CEOs to delay major investment decisions. Although clarity on tariffs remains unclear, the One Big Beautiful Bill³ cuts corporate taxes by speeding up depreciation, freeing up more cash that could boost deal flow. This might offset some tariff-related worries, which could be positive for small-cap stocks targeted for M&A deals," said Weiss. "Second, Federal Reserve rate cuts should help revive private equity buyouts that rely heavily on borrowed funds. Given the historically appealing valuations of many of these companies, small-caps could become attractive targets for these buyouts."

The importance of diversification and a long-term view

In light of these market shifts, diversification and a long-term perspective remain essential, Zhang emphasized.

"Short-term market shifts highlight the importance of having exposure across a fuller range of asset classes. Investors with diversified portfolios have likely been better positioned to weather periods of uncertainty and capture opportunities in 2025," said Zhang. "Our investment teams look through the near-term uncertainty to identify enduring investment opportunities with lasting potential. While recent shifts in market leadership may have surprised some investors, they have only reinforced the value of investing with a long-term view."

As investors navigate these complex dynamics, staying informed and maintaining a disciplined approach will be key to achieving long-term financial goals. For more quarterly investment insights for 2025, read the full American Century investment outlook, with insights on:

About American Century Investments
American Century Investments is a leading global asset manager focused on delivering investment results and building long-term client relationships while supporting breakthrough medical research. Founded in 1958, American Century Investments' 1,400 employees serve financial professionals, institutions, corporations and individual investors from offices in Kansas City, Missouri; New York; Los Angeles; Santa Clara, California; Portland, Oregon; London; Frankfurt, Germany; Hong Kong; and Sydney. Jonathan S. Thomas is chairman, chief executive officer and president, and Victor Zhang serves as chief investment officer. Delivering investment results to clients enables American Century Investments to distribute over 40% of its dividends to the Stowers Institute for Medical Research, a 500-person, nonprofit biomedical research organization with a focus on foundational research. The Institute owns more than 40% of American Century Investments and has received dividend payments of more than $2 billion since 2000. For more information about American Century Investments, visit www.americancentury.com.

*Assets under supervision as of 9/19/2025.

¹The Magnificent 7 stocks are seven tech companies that have been the best-performing, most influential, and high-growth companies over the best decade. Those seven stocks typically include Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), Meta Platforms (META), Tesla (TSLA), and Nvidia (NVDA).

² Price to earnings multiple is the ratio of share price of a company's share price to its earnings per share.

³H.R.1 - One Big Beautiful Bill Act public law passed on July 4, 2025 source: Congress.gov https://www.congress.gov/bill/119th-congress/house-bill/1/text

Past performance is no guarantee of future results. 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.

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.

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

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.

SOURCE American Century Investments