Markets May Be Underpricing Risk

Financial markets may be underpricing both upside and downside risks even as investment opportunities broaden beyond the narrow artificial intelligence (AI)-led trade, according to American Century Investments' third quarter 2026 investment outlook. The global asset manager, which has more than $340 billion* in assets under management, believes the environment calls for active risk management, careful security and sector selection, and discipline amid elevated volatility.

Active management matters as market risk appears underpriced

While steady growth remains the base case, the range of possible outcomes has widened. Geopolitical uncertainty is complicating the outlook for inflation and interest rates, making it harder for markets to price risk with confidence.

"Rising geopolitical tensions are affecting inflation expectations and the path of interest rates, making the fixed-income environment more volatile and less predictable," said Victor Zhang, senior vice president and chief investment officer of American Century.

Charles Tan, global fixed income chief investment officer for American Century, sees that uncertainty in two tail-risk scenarios: an upside case in which lower energy prices help reveal a cyclical rebound in the U.S. economy, potentially prompting the Federal Reserve to resume tightening; and a downside case in which prolonged constraints on the Strait of Hormuz push oil prices higher and weigh on global growth when policymakers have limited room to respond.

"We believe steady economic growth remains the most likely course ahead. However, the upside and downside tails of that outlook have grown fatter. In our view, financial markets aren't pricing enough risk premiums for either the upside tail or the downside tail. Accordingly, our active fixed-income approach highlights middle-of-the-road risk/reward exposure in our portfolios while seeking security- and sector-specific opportunities," said Tan.

Opportunities are broadening beyond the obvious AI trade

Beyond risk management, the outlook points to opportunities outside the narrow AI-led market narrative. American Century investment leaders cite emerging markets, renewable energy, global supply chains and energy diversification as areas where growth drivers may be broader than investors assume.

Patricia Ribeiro, global equity co-chief investment officer for American Century, said emerging markets may benefit from multiple sources of growth, including AI-driven capital expenditures, favorable demographics, rising discretionary spending, renewable energy capacity and their role in supply chains for electric vehicles, solar power and rechargeable batteries.

Energy is another example of the broader opportunity set. Ribeiro sees global volatility increasing the importance of supply security and benefiting select companies across traditional and alternative energy sources.

"The volatility in global energy markets could create opportunities for select firms across oil, gas, nuclear and renewables as buyers diversify their energy sources. The closure of the Strait of Hormuz has underscored the importance of energy independence for nations that are net importers of oil and gas," said Ribeiro. "We think this shift in attitude could endure even after the Strait reopens."

Volatility is elevated, but investors should stay focused on long-term goals

While the outlook highlights risks and opportunities, it also urges investors not to let short-term volatility overwhelm long-term planning.

"While we recognize these challenges, we don't believe they should alter your investment goals. Remember, investing is a marathon, not a sprint. The biggest financial goals - funding retirement, a bequest or a child's education - span decades. So try to focus on your financial future over short-term market fluctuations," said Keith Lee, global growth equity co-chief investment officer for American Century.

Taken together, the message is that investors should prepare for a wider range of outcomes without losing sight of long-term objectives: actively manage risk, look beyond the most crowded trades and stay disciplined as conditions shift.

The full American Century investment outlook includes insights on global macroeconomics, U.S. and global equities, fixed income, multi-asset strategies and sustainable investing trends.