The word “tariffs” was often mentioned during last year’s race for the White House, and it increasingly appears to be the lynchpin of President Donald Trump’s economic plan.

Less than a week before his inauguration as 47th President of the United States, Trump announced plans to create a new agency called the External Revenue Service to collect the tariffs and other revenue from foreign nations.

“We will begin charging those that make money off of us with Trade, and they will start paying,” Trump said on his social media site, Truth Social. He compared his planned creation to the Internal Revenue Service (IRS). The creation of any new agency requires an act of Congress, but Republicans do have a slight majority of both the House and the Senate.

In its first 2025 investment outlook, the $270 billion global asset manager American Century Investments focuses on the opportunities and risks that could arise in the new year with a new Congress and a new administration, while recognizing that overall, the market is in better shape now than it was a year ago.

"Looking into 2025, we're in a much better position than last year. Some 12 months ago, the Federal Reserve (Fed) was still on hold, inflation seemed stuck above target, and many were bracing for a recession," said Victor Zhang, chief investment officer of American Century. "2024 was an eventful year, but the economy is still growing, inflation is heading in the right direction, and central banks worldwide have embarked on rate cutting."

While the market is overall in a stronger position relative to a year ago, the chief investment officers of American Century anticipate market volatility given the economic signs and changing political, regulatory and legislative landscape.

"Still-high interest rates, persistent above-target inflation and weaker labor market data may eventually weigh on the economy. We still believe the U.S. is likely headed for a slowdown in which flat to slightly positive economic growth will emerge. Accordingly, we expect uneven economic data combined with policy reveals to lead to continued bond market volatility," says Charles Tan, co-chief investment officer for global fixed income.

While volatility is expected, it remains to be seen what the market impacts of the new administration will be, with a wide range of possible outcomes.

"Another big unknown is whether we will see more moderate or more aggressive policies from the new administration,” adds Rich Weiss, chief investment officer of multi-asset strategies for American Century. He explained the former would involve corporate tax cuts, lighter tariffs and immigration policies, and less regulation/more stimulative fiscal measures. “This scenario might be beneficial for stocks because lower taxes and less regulation mean higher corporate profits and minimal disruption to the labor force and trade.”

More aggressive policies, however, might be less favorable for financial markets, Weiss cautioned. “Higher tariffs, trade conflicts, and significant changes to the labor force could impact economic growth, hurt productivity, and promote inflation.”

Nonetheless, as Tan reminds investors: "As history has frequently demonstrated, volatility often leads to opportunities." In the first quarter 2025 investment outlook, American Century chief investment officers identify several areas of expected opportunities:

Artificial intelligence
"We've consistently argued that we're still in the early stages of an AI revolution, with opportunities and impacts touching nearly every sector of the economy. Currently, much of the focus is on the chips themselves. However, the infrastructure needed to develop this technology has significant implications for data centers, power demand and the need for energy-efficient chips and cooling technology," says Keith Lee, global growth equity co-chief investment officer of American Century.

Factory automation
"Factory automation is another long-running secular trend. These stocks have recently been volatile due to an industrial slowdown in the U.S. over the last year. However, we focus on companies that can innovate and strengthen their competitive positions over multiple economic cycles, not just in the short term. This trend has wide-reaching benefits, not only for the companies automating their processes but also for the robotics companies and parts suppliers that support this progress," Lee added.

Health care innovation
"Drug companies are identifying new approaches to treating diseases, making this segment a major secular driver of growth. Robotic surgery and medical device companies are making massive strides in providing more effective tools and procedures, resulting in better outcomes and fewer patient complications. Other companies are evolving to meet the demand for more cost-effective, accessible care," says Lee.

Financial sector, especially banks
"Trump's winning may support a comeback for stocks in the challenged financials sector. Banks have rallied since Trump's win,” notes Kevin Toney, global value equity chief investment officer of American Century. “Bankers believe he may roll back the 2023 regulations, which include more stringent capital requirements. In addition, Trump-appointed officials will shape the Basel III Endgame, the final set of international banking regulations enacted after the Great Financial Crisis. These regulations cover capital rules, liquidity proposals and long-term debt rules."

Mergers and acquisitions
"There's speculation that a Trump administration could loosen the federal government's grip on mergers and acquisitions,” Toney adds. “The Biden administration was among the toughest in modern history on corporate dealmaking. Bank mergers took 42% longer to close under the Biden administration than during the first Trump presidency. While Trump may not take a hands-off approach to all corporate mergers — his first term showed he was willing to scrutinize technology deals — he might be more lenient with bank mergers."

Most of the risks in 2025 are tied to corporate earnings, interest rates, the Chinese economy and tariffs. What to watch:

Poorer than expected corporate earnings
"Stock valuations are expensive based on what we believe are aggressive 2025 earnings expectations. With stocks at record highs, you should expect volatility if corporate America fails to hit these lofty targets," warns Lee.

China's economy
"The average Chinese consumer has 70% of their wealth tied up in real estate assets, so consumption has slowed," explains Toney. This means China's extended property market downturn and weak consumer demand are hurting the sales of U.S. and non-U.S. companies that target the world's largest consumer class.

"Even while China's consumption, construction and other economic activities are slowing, the country is still producing industrial materials and products. If it can't use or sell those products domestically, China sends them elsewhere, which affects the global economy,” Toney adds. “With lower demand due to slowing construction, China is exporting steel in ever greater numbers. China exported 92.3 million metric tons of steel, a 39% increase from 2022. That depressed worldwide steel prices and resulted in U.S. tariffs on Chinese steel and other anti-dumping measures in markets like Japan and South Korea. Similarly, China is flooding foreign markets — particularly Europe — with electric vehicles that its domestic manufacturers continue producing.”

Tariffs
"It's uncertain whether President-elect Donald Trump will follow through on his promise to impose 60% tariffs on Chinese goods. If he does, the effects will be unpredictable," cautions Toney. "Trump appears likely to impose tariffs on select goods from China, but his broader tariff strategy remains unclear. Furthermore, the impact on inflation may not be as dire as the market expects, given that some tariffs could restrict demand and slow down consumption," adds Tan.

Despite these large unknowns and risks, American Century chief investment officers continue to remind investors that staying invested, diversification and investing over the long term have been the best tools for successfully navigating political transitions in the past and taking advantage of market opportunities as they arise.

"While we're mindful of economic and political conditions, they aren't central to our investment strategy. We don't think they should be the primary factor in your decision-making either,” Lee emphasizes. “When it comes to investing, we're trying to compound wealth for our shareholders over the long term. We're trying to identify next decade's winners, so we look beyond economic and electoral cycles. In other words, we focus on long-term fundamentals rather than short-term policy changes.”

American Century’s core piece of advice: "Our North Star has always been to own what we believe are great businesses — those producing superior profitability and growth — with long runways of opportunity."

For more information about American Century Investments, visit www.americancentury.com.