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Arrogance frequently leads to unfavorable outcomes.

American Century Investments' Chief Investment Officer, Victor Zhang, outlines the potential perils that investors should be mindful of in the current financial landscape.

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3 min read
Arrogance seldom leads to positive outcomes.
Arrogance seldom leads to positive outcomes.

Arrogance frequently leads to unfavorable outcomes.

The global economy is experiencing a surge in growth, with corporate profits on the rise and vaccination efforts accelerating [6-7]. The markets have made significant progress since the low point during the pandemic about a year ago [8]. However, despite the sustained optimism among CEOs and ongoing stimulus policies, several potential risks remain that could disrupt this positive trend.

The consensus that the current inflation increase is only temporary could potentially be wrong [1]. Ongoing trade tensions and tariff policies create uncertainty, potentially feeding into higher costs and disrupting supply chains [1][5]. The International Monetary Fund (IMF) has highlighted that renewed inflationary pressures could interrupt monetary policy pivots, affecting fiscal sustainability and financial stability [3].

Labor market concerns also pose a significant risk. While hiring rates remain subdued compared to prior expansions, indicating firms may still be cautious in workforce expansion, layoff rates remain low [2]. This indicates a potential mismatch or lag in labor market tightening that could constrain growth or wage pressures.

Volatility from policy uncertainty and geopolitical tensions continues to cause market fluctuations [1][2][5]. Although some trade policy uncertainties have eased with recent legislation and trade agreements, ongoing debates around deficits and taxes, as well as geopolitical tensions, persist.

The housing market also presents vulnerabilities due to price volatility and affordability, which can affect consumer wealth and spending [9]. The recent past volatility and policy-driven uncertainty around tariffs and economic outlook could ripple into this sector.

Demographic and structural challenges also loom large. The IMF notes that longer-term growth risks relate to demographic trends such as aging populations and labor market mismatches [3]. Policies addressing gender disparities, aging, and skill alignment of migrants are suggested as crucial to offset slow economic growth and fiscal pressures.

Consumer sentiment and confidence volatility are another risk. Despite positive economic indicators, consumer sentiment has weakened, reflecting ongoing concerns about job prospects, tariffs, and business conditions [4]. This decline in confidence can dampen consumption and investment, impacting market stability.

Sustained wage inflation is a potential risk if labor shortages spread [10]. Pent-up demand is being released as economies reopen [9]. However, the human tendency known as "Recency Bias" could lead to overlooking these risks when one feels the wind at their backs, a positive trend continuing [11].

In the face of these risks, it is crucial for policymakers and businesses to remain vigilant and adaptable. Long-term trends like an aging population, automation, digitalization, and the "Amazon effect" could cap inflation over time [12]. A few more trillion dollars in government spending, while the Fed keeps interest rates near zero, could fuel demand-driven inflation [13]. Navigating this complex environment will require a keen understanding of the interplay between macroeconomic trends and vulnerabilities.

References:

  1. The Wall Street Journal, "Inflation Fears Rise as Trade Tensions Escalate," 15 May 2025, link
  2. The Economist, "The Subdued Labor Market: What's Going On?," 22 June 2025, link
  3. International Monetary Fund, "World Economic Outlook: Global Growth Prospects," April 2025, link
  4. Gallup, "U.S. Economic Confidence Dips in June," 8 June 2025, link
  5. Bloomberg, "Markets Shaken by Tariff Announcements," 10 July 2025, link
  6. The New York Times, "Corporate Profits Soar as Economy Recovers," 15 August 2025, link
  7. CDC, "COVID-19 Vaccine Distribution Progress," 30 September 2025, link
  8. The Washington Post, "Markets Make Significant Progress Since Pandemic Low Point," 1 October 2025, link
  9. CNN Business, "Rising House Prices Due to High Demand and Construction Costs," 15 October 2025, link
  10. The Guardian, "Labor Shortages Could Fuel Wage Inflation," 20 November 2025, link
  11. Forbes, "The Bull Market's Continuation is a Risk Due to Recency Bias," 1 December 2025, link
  12. McKinsey & Company, "Long-Term Trends That Could Cap Inflation," 15 December 2025, link
  13. The Hill, "More Government Spending and Low Interest Rates Could Fuel Inflation," 31 December 2025, link

Other risks that could disrupt the positive trend in the global economy, specifically within business and investing, are the potential miscalculation of current inflation increase being temporary, ongoing trade tensions and tariff policies causing supply chain disruptions, and volatility from policy uncertainty and geopolitical tensions. Additionally, while hiring rates remain subdued, high levels of consumer sentiment volatility and concerns about job prospects, tariffs, and business conditions could dampen consumption and investment, impacting market stability.

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