MARKET INSIGHTS

Weekly market commentary

The need to diversify diversifiers

Market take

Weekly video_20260526

Beata Harasim

Senior Investment Strategist

BlackRock Investment Institute

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CAPITAL AT RISK. MARKETING MATERIAL.

Opening frame: What’s driving markets? Market take

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Title slide: The need to diversify diversifiers

Surging long-term bond yields are reinforcing one of our key views: traditional portfolio hedges are less reliable in today’s macro regime. We think investors need a Plan B — built around more unique sources of return.

1: Traditional diversifiers under pressure

Long-term government bond yields have surged again, with US 30-year Treasury yields reaching their highest levels in roughly two decades.

That matters because government bonds have historically helped cushion portfolios when risk assets fall. But that role is being tested. Since the onset of the Middle East conflict, US Treasuries have come under further pressure as investors have focused on sticky inflation, energy supply risks and persistent fiscal deficits.

Gold, often viewed as an inflation hedge, has also fallen over this period. That reinforces our view that the old playbook for diversification is becoming less reliable.

2: A shifting macro regime

Why is this happening? We think markets are adjusting to a new macro regime shaped by mega forces.

Geopolitical fragmentation is increasing the risk of supply shocks. Persistent fiscal deficits are putting upward pressure on long-term borrowing costs. And the AI buildout is driving major investment demand.

Together, these forces point to higher-for-longer inflation and interest rates than markets were used to before the pandemic. That is why we prefer short- and medium-term US government bonds over long-term bonds. We also continue to like inflation-linked bonds on strategic horizons over five years or more.

3: Building a plan B

We still stay pro-risk, supported by solid corporate earnings and the AI theme. Strong earnings growth has helped equities absorb the drag from higher rates so far.

But at the total portfolio level, we think investors need broader diversification sources. We favor idiosyncratic return streams, especially hedge funds and private markets, where returns are less dependent on broad stock and bond market moves.

Outro: Here’s our Market take

Traditional portfolio diversification is being challenged as long-term bond yields rise and old safe havens prove less reliable. We think investors need a Plan B — using broader sources of return while staying pro-risk on solid earnings and the AI theme.

Closing frame: Read details: blackrock.com/weekly-commentary

Finding diversification

Surging bond yields underscore our view that traditional portfolio diversifiers are challenged. We favor unique diversifiers: active returns and private markets.

Market backdrop

Since the Mideast conflict began, the S&P 500 is up 8%, while front month Brent crude prices are up 43% and US 10-year yields nearly 60 basis points.

Week ahead

US PCE data will help confirm the CPI’s upside surprise showing higher core inflation as markets price in a Federal Reserve interest rate hike later this year.

The supply chain disruptions from the Middle East conflict and the accelerating AI buildout have caused some of the sharpest moves in long-term bond yields across developed markets. US 30-year bond yields hit two-decade highs above 5% last week, up 40 basis points since the start of the war. We see our diversification mirage theme playing out in real time as bonds don’t cushion portfolios against risk asset selloffs. We favor diversifiers such as hedge funds and private markets.

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Market commentary Asset class views
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Hard to find

Cross-asset performance, Feb. 27-May 22, 2026

This chart shows how traditional portfolio hedges are proving less reliable in today's market environment: Since the onset of the Middle East conflict, returns on US 10-year Treasuries have been negative.

Past performance is not a reliable indicator of current or future results. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index. Source: BlackRock Investment Institute with data from LSEG Datastream, May 2026. Note: Lines show the returns of various assets since Feb. 27, 2026. Total returns are shown for the S&P 500 and US Treasury, the latter proxied by 10-year US Treasuries.

The selloff in long-term government bonds is a reminder that traditional portfolio hedges are proving less reliable today: Since the onset of the Middle East conflict, returns on US 10-year Treasuries have been negative, driven by energy supply disruption concerns adding to already sticky inflation and persistent fiscal deficits. Stocks and long-term bonds have increasingly sold off together as these concerns dominate markets. But pressure on traditional diversifiers hasn’t been confined to bonds: gold, touted as a portfolio diversifier that has sometimes worked in the past, has slid 15% since the conflict began, partly due to crowded positioning. See the chart. This underscores how long-held safe havens can become unreliable hedges. We think diversification is harder to achieve – thus the mirage – and that’s why investors need to diversify their diversifiers, in our view.

The Mideast conflict has triggered a broader reset in interest rate expectations amid fears that supply chain disruptions would add to already sticky inflation. The shift has been drastic: markets went from expecting rate cuts before the conflict to now pricing in Federal Reserve and Bank of England rate hikes. More recently, another factor has pushed yields higher: Investors are now demanding more term premium – or greater compensation to hold long-term government bonds – our long-held view. The term premium embedded in US 10-year yields is rising back near its highest levels in 12 years, according to New York Fed estimates of the ACM model. The changing base of the US Treasury market is also a factor. The make-up of investors is shifting toward short-term, leveraged players quick to sell – and push up long-term yields – in volatile markets. This validates our preference for short- and medium-term US government bonds over long-term bonds.

Hunting for new diversifiers

These developments require finding ways to shield portfolios against higher inflation. The macro regime is shaped by mega forces as stubborn inflation and higher rates become structural features. Geopolitical fragmentation adds to the risk of ongoing supply disruptions, while persistent fiscal deficits in major economies pile pressure on long-term borrowing costs. At the same time, the AI buildout is driving sustained investment demand across the economy, further stoking inflation and demand for capital. That’s one of the reasons we favor inflation-linked bonds on strategic horizons of five years or longer.

These developments also reinforce why new sources of portfolio diversification are needed. For strategic horizons, we like hedge funds and private markets as diversifiers less reliant on broader market moves and instead tied to manager skill. We favor macro and absolute return hedge fund strategies that can better diversify portfolios when macro shocks hit risk assets broadly. In private markets, we like infrastructure equity with cash flows often linked directly to inflation, as well as private credit tied to AI-driven investment demand. On a tactical horizon, the AI mega force underpins our pro-risk stance, supported by strong corporate earnings growth and balance sheets. Earnings growth has offset the drag from higher interest rates and helped stocks absorb the sharp rise in yields – though we’re monitoring this key risk to our view.

Our bottom line

Traditional portfolio diversification is challenged today, underscoring the need for broader diversification sources. We stay pro-risk on solid corporate earnings and the AI theme.

Market backdrop

US 30-year Treasury yields hit a 19-year high before easing as the global bond selloff paused. The S&P 500 was little changed near record highs as SpaceX set out its plan for what could be a record-sized stock listing. The S&P 500 has added 8% since the Mideast conflict began. European stocks outperformed with a 3% gain. Brent crude oil fell about 5% on hopes for a resolution to the conflict but is up about 70% this year. Energy flows through the Strait of Hormuz remain very limited.

We eye US core PCE for signs that higher energy costs are feeding through to underlying inflation. This comes as the Fed already faces a tougher trade-off between reining in inflation and supporting growth. We have been positioned for such an environment, underscored by our caution on long-term government bonds. We also eye Japan CPI data for evidence that inflation pressures remain persistent globally.

Week ahead

The chart shows that brent crude is the best-performing asset year-to-date, while bitcoin is the worst.

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of May 21, 2026. Notes: The two ends of the bars show the lowest and highest res at any point year to date, and the dots represent current year-to-date res. Emerging market (EM), high yield and global corporate investment grade (IG) res are denominated in US dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE US Dollar Index (DXY), spot gold, spot bitcoin, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (US, Germany and Italy), Bloomberg Global High Yield Index, J.P. Morgan EMBI Index, Bloomberg Global Corporate Index and MSCI USA Index.

May 26

US consumer confidence

May 28

US PCE inflation

May 29

US PMI; Japan CPI & unemployment

May 30

China PMI

Read our past weekly commentaries here.

Big calls

Our highest conviction views on six- to 12-month (tactical) and over five-year (strategic) horizons, May 2026

Reasons
Tactical  
Favor AI beneficiaries We favor infrastructure and equipment supporting the AI buildout such as semiconductors, power and data centers. We think they stand to benefit no matter AI’s eventual winners or losers. We see the AI boom lifting US corporate earnings. underpinning our US equity overweight.
Selected international exposures We like hard-currency EM debt on economic resilience, disciplined fiscal and monetary policy and a high ratio of commodities exporters. We’re also overweight EM equities, preferring commodity exporters and AI beneficiaries. In Europe, we favor equity sectors like infrastructure.
Evolving diversifiers We suggest looking for “plan B” portfolio hedges such as thematic opportunities related to the AI built-out and search for energy security. Long-term US Treasuries no longer provide a buffer against equity market declines, and gold also has shown to be an ineffective diversifier.
Strategic  
Portfolio construction We favor a scenario-based approach as AI winners and losers emerge. We lean on private markets and hedge funds for idiosyncratic returns and to anchor portfolios in mega forces.
Infrastructure equity and private credit We find infrastructure equity valuations attractive as geopolitical fragmentation and the AI build-out underpin structural demand. We still like private credit but see an increase in dispersion of returns. This highlights the importance of manager selection.
Beyond market cap benchmarks We get granular in public markets. We favor DM government bonds outside the US Within equities, we favor EM over DM – and get selective in both. In EM, we like India because it sits at the intersection of mega forces. In DM, we like Japan amid inflation and corporate reforms.

Note: Views are from a US dollar perspective, May 2026. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.

Tactical granular views table

Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, May 2026

Legend Granular

We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility.

Granular views

Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, May 2026

Asset   Tactical view Commentary
Equities      
United States   United States: tactical Overweight +1 We are overweight. Contained damage to global growth from the Mideast conflict and strong earnings expectations – particularly in tech – keep us risk-on.
Europe   Europe: tactical neutral We are neutral. Europe’s high exposure to the energy shock from the Mideast conflict makes it vulnerable to higher inflation and lower growth.
UK   UK: tactical neutral We are neutral. Valuations remain attractive relative to the US, but we see few near-term catalysts to trigger a shift.
Japan   Japan: tactical neutral We are neutral. Japan’s exposure to imported energy may erode strong equity gains powered by healthy corporate balance sheets and governance reforms.
Emerging markets (EM)   Emerging markets: tactical overweight +1 We are overweight yet stay selective. We favor Asian countries that manufacture critical AI components and Latin American energy and commodity exporters.
China   China: tactical Neutral We are neutral. Trade relations with the US have steadied, but property stress and an aging population still constrain the macro outlook. Relatively resilient activity limits near-term policy urgency. We like sectors like AI, automation and power generation.
Fixed income      
Short US Treasuries   Short US Treasuries: tactical Neutral We are neutral. Shorter-term bonds are relatively attractive as the market has woken up to persistent inflation and higher rates.
Long US Treasuries   Long US Treasuries: tactical underweight We are underweight. Yields already faced upward pressure from rising term premia, as investors demand more compensation for the risk of holding long-term debt. The recent energy price shock compounds this by aggravating pre-existing inflationary pressures.
Global inflation-linked bonds   Global inflation-linked bonds : Neutral We are neutral. We think inflation will settle above pre-pandemic levels, but markets may not price this in the near term as growth cools.
Euro area government bonds   Euro area government bonds: tactical Neutral We are neutral short-term European government bonds. The market has repriced the ECB policy path more in line with our view. We think increased German bond issuance to finance its fiscal stimulus package is already largely reflected in the current level of 10-year yields.
UK Gilts   UK gilts: tactical Neutral We are neutral. We expect volatility in gilts over the near-term. Gas powers much of the UK’s electricity, but storage is limited – making it especially vulnerable to a resurgence in inflation.
Japanese government bonds   Japan government bonds: tactical Underweight -2 We are underweight. Rate hikes, higher global term premium and heavy bond issuance will likely drive yields up further.
China government bonds   China government bonds: tactical Neutral We are neutral. China bonds offer stability and diversification but developed market yields are higher and investor sentiment shifting towards equities limits upside.
US agency MBS   US agency MBS: tactical overweight We are overweight. Agency MBS offer higher income than Treasuries with similar risk, and may offer more diversification amid fiscal and inflationary pressures.
Short-term IG credit   Short-term IG credit: tactical neutral We are neutral. Corporate strength means spreads are low, but they could widen if issuance increases.
Long-term IG credit   Long-term IG credit: tactical Underweight -1 We are underweight. We prefer short-term bonds less exposed to interest rate risk over long-term bonds.
Global high yield   Global high yield: tactical Neutral We are neutral. High yield offers more attractive carry and shorter duration, but we think dispersion between higher and weaker issuers will increase.
Asia credit   Asia credit: tactical Neutral We are neutral. Overall yields are attractive and fundamentals are solid, but spreads are tight.
Emerging hard currency   Emerging hard currency: tactical underweight We are overweight. EM hard-currency indexes lean towards Latin American commodity exporters such as Brazil that stand to benefit as Mideast supply plummets.
Emerging local currency   Emerging local currency: tactical neutral We are neutral. The US dollar has been strengthening as a safe-haven currency in the wake of the Middle East conflict. This could reverse year-to-date gains driven by a falling USD.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a US dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, May 2026

Legend Granular

We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility.

Asset Tactical view Commentary
Equities    
 Europe ex UK Europe ex-UK: tactical Neutral We are neutral. We would need to see more business-friendly policy and deeper capital markets for recent outperformance to continue and to justify a broad overweight. We stay selective, favoring financials, utilities and healthcare.
Germany Germany: tactical Neutral We are neutral. Increased spending on defense and infrastructure could boost the corporate sector. But valuations rose significantly in 2025 and 2026 earnings revisions for other countries are outpacing Germany.
France France: tactical Neutral We are neutral. Political uncertainty could continue to drag corporate earnings behind peer markets. Yet some major French firms are shielded from domestic weakness, as foreign activity accounts for most of their revenues and operations.
Italy Italy: tactical Neutral We are neutral. Valuations are supportive relative to peers. Yet we think the growth and earnings outperformance that characterized 2022-2023 is unlikely to persist as fiscal consolidation continues and the impact of prior stimulus peters out.
Spain Spain: tactical Overweight +1 We are overweight. Valuations and earnings growth are supportive relative to peers. Financials, utilities and infrastructure stocks stand to gain from a strong economic backdrop and advancements in AI. High exposure to fast-growing areas like emerging markets is also supportive.
Netherlands Netherlands: tactical Neutral We are neutral. Technology and semiconductors feature heavily in the Dutch stock market, but that’s offset by other sectors seeing less favorable valuations and a weaker earnings outlook than European peers.
Switzerland Switzerland: tactical Neutral We are neutral. Valuations have improved, but the earnings outlook is weaker than other European markets. If global risk appetite stays strong, the index’s tilt to stable, less volatile sectors may weigh on performance.
UK UK: tactical Neutral We are neutral. Valuations remain attractive relative to the US, but we see few near-term catalysts to trigger a shift.
     
Fixed income    
Euro area government bonds Euro area government bonds: tactical neutral We are neutral short-term European government bonds. The market has repriced the ECB policy path more in line with our view. We think increased German bond issuance to finance its fiscal stimulus package is already largely reflected in the current level of 10-year yields.
German bunds German bunds: tactical neutral We are neutral. Markets have largely priced in fiscal stimulus and bond issuance, and expectations for policy rates align with our view.
French OATs French OATs: tactical neutral We are neutral. Political uncertainty, high budget deficits and slow structural reforms could stoke volatility, but current spreads incorporate these risks and we don’t expect a worsening from here.
Italian BTPs Italian BTPs: tactical Neutral We are neutral. Demand from Italian households is strong at current yield levels. Spreads tightened in line with its sovereign credit upgrade, but a persistently high debt-to-GDP levels means they likely won’t tighten further.
UK gilts UK gilts: tactical Neutral We are neutral. We expect volatility in gilts over the near-term. Gas powers much of the UK’s electricity, but storage is limited – making it especially vulnerable to a resurgence in inflation.
Swiss government bonds Swiss government bonds: tactical Neutral We are neutral. We don’t think the Swiss National Bank will slash policy rates to below zero, as markets expect.
European inflation-protected securities European inflation protected securities: tactical Neutral We are neutral. Our medium-term inflation expectations align with those implied in current market pricing.
European investment grade European investment grade: tactical Neutral We are neutral. We favor short- to medium-term debt and Europe over the US An intense re-leveraging cycle to support the AI buildout could put upward pressure on US spreads, making Europe relatively more attractive.
European high yield European high yield: tactical Overweight +1 We are overweight. Spreads hover near historic lows, but credit losses have been limited in this cycle and better economic growth in 2026 could reduce them further.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, May 2026. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

Meet the authors

Wei Li

Wei Li

Global Chief Investment Strategist – BlackRock Investment Institute
Simon Wan

Simon Wan

Portfolio Manager – BlackRock Multi-Asset Strategies and Solutions
Beata Harasim

Beata Harasim

Senior Investment Strategist – BlackRock Investment Institute
Devan Nathwani

Devan Nathwani

Portfolio Strategist – BlackRock Investment Institute

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