MARKET INSIGHTS

Weekly market commentary

9 déc. 2024
  • BlackRock Investment Institute

Staying pro-risk into 2025

BlackRock Bottom Line: BlackRock Investment Institute 2025 Global Outlook

Speaker: Wei Li, Global Chief Investment Strategist, BlackRock

Script:

Mega forces, like the rise of artificial intelligence (AI) and geopolitical fragmentation, are transforming economies. That means investors can no longer view the world in terms of business cycles or temporary deviations around stable long-term trends. Understanding the forces reshaping global economies can help investors identify unique opportunities.

Our three investment themes as we head into 2025 are: financing the future, rethinking investing and staying pro-risk.

Title: BlackRock Investment Institute 2025 Global Outlook

Our first theme is financing the future. Sizable capital will be needed as the rise of AI, the low-carbon transition and other mega forces drive a broad infrastructure buildout. With governments constrained by high public debt, capital markets will play a pivotal role in providing the funding needed. Private markets can offer exposure to broader sources of credit as well as to early-stage growth companies driving AI adoption.

Our second theme is rethinking investing. An ever-changing outlook calls for an ever-evolving portfolio. It calls into question many long-held investing principles, including the idea of a neutral benchmark portfolio like the traditional 60/40 portfolio mix of stocks and bonds. As mega forces reshape whole economies, we think investors should focus more on themes and less on broad asset classes. And with a wide range of possible outcomes, investors may wish to reassess portfolios more often.

Our third theme is staying pro-risk. We see the U.S. still standing out versus other developed markets thanks to stronger economic growth and its ability to capitalize on mega forces. We recognize some U.S. equity valuations look expensive but don’t think historical averages are necessarily a good guide amid a transformation.

The bottom line is: Moving into 2025, we think investors could benefit from viewing the world through the lens of transformation. We stay risk-on as we look for transformation beneficiaries. We think being more dynamic with portfolios and getting granular with views will both be essential.

Transformation underway

Structural shifts, like artificial intelligence, are reshaping economies. We stay pro-risk and up our U.S. stocks overweight as we see beneficiaries broadening.

Market backdrop

U.S. stocks hit new highs last week. November’s U.S. jobs report showed wage growth above the level that would allow inflation to settle at the Fed’s target.

Week ahead

We see the European Central Bank cutting rates by 25 basis points this week. U.S. CPI should show services inflation staying sticky on solid wage gains.

This year has reinforced that we are not in a typical business cycle. Instead, mega forces – big structural shifts like the rise of artificial intelligence (AI) – are transforming economies and altering their long-term trajectories. That calls for a new way of investing: being more dynamic and putting more focus on themes and less on broad asset classes. We stay risk-on in our 2025 Outlook and up our U.S. equity overweight as the AI theme broadens out – but stand ready to dial down risk.

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Ever-bigger share
“Magnificent 7” market cap as a share of the S&P 500, 1995-2024

The chart shows the magnificent 7 tech stocks soaring as a share of the S&P 500's total market cap in recent years.

Past performance is not a reliable indicator of future results. It is not possible to invest in an index. Indexes are unmanaged and performance does not account for fees. Source: BlackRock Investment Institute, with data from LSEG Datastream, December 2024. Notes: The chart shows the combined market capitalization (cap) of the “magnificent 7” stocks (Amazon, Apple, Google, Meta, Microsoft, Nvidia and Tesla) as a share of the S&P 500’s total market cap. The chart sums up the market cap of each stock as they went public, capturing Amazon from 1997 onwards, Nvidia from 1999, Google from 2004, Tesla from 2010 and Meta from 2012.

We think investors should no longer think in terms of business cycles, with short-term fluctuations in activity leading to expansion or recession. Instead, mega forces are driving an economic transformation that could keep shifting the long-term trend, making a wide range of very different outcomes possible – on the upside and downside. Building the transformation – such as with AI data centers – requires a major infrastructure buildout. Financing the transformation given constrained public finances means that capital markets, including private markets, will be key. Markets are starting to reflect these shifts: The “magnificent 7” of mostly mega-cap tech shares now make up almost a third of the S&P 500’s market capitalization. See the chart. We think this calls for rethinking investing, and challenges investment strategies based on valuations converging back to historical trends.

We follow that playbook as we stay pro-risk headed into 2025. We increase our overweight to U.S. stocks as we expect AI beneficiaries to broaden out beyond tech. We’re also confident U.S. equities can keep outpacing global peers given the ability to better capitalize on mega forces, a favorable growth outlook, potential tax cuts and regulatory easing. Signposts for changing our view include any surge in long-term bond yields or an escalation in trade protectionism. Pricey U.S. equity valuations, based on price-to-earnings ratios and equity risk premiums, don’t yet change our view. Why? We find valuations affect near-term returns less than long-term returns. The equity risk premium – a common valuation gauge – for the equal-weighted S&P 500 is near its long-term average, according to LSEG data, and thus looks less affected by the transformation.

Harnessing the transformation

U.S. outperformance is unlikely to extend to government bonds. We go tactically underweight long-term Treasuries as we expect investors to demand more compensation for the risk of holding them given persistent budget deficits, sticky inflation and greater bond market volatility. We favor government bonds in other developed markets. Globally, Japanese equities stand out due to corporate reforms and the return of mild inflation that are driving corporate pricing power and earnings growth.

More broadly, we think investors can find opportunities by tapping into the transformation we expect in the real economy. AI and the low-carbon transition require investment potentially on par with the Industrial Revolution. Major tech companies are starting to rival the U.S. government on research and development spending. Plus, meeting growing energy demand will generate US$3.5 trillion of investment per year this decade, according to the BlackRock Investment Institute Transition Scenario. We see private markets playing a vital role in financing the future. Big spending on AI and the low-carbon transition plus rising geopolitical fragmentation is likely to cause persistent U.S. inflation pressures. And an aging workforce could start to bite as immigration slows, likely keeping wage growth too high for inflation to return to the Fed’s 2% target. We think that means the Fed will keep rates well above pre-pandemic levels even after cutting some in 2025.

Our bottom line

Mega forces are reshaping economies and markets. That requires a new playbook challenging old investment rules. We stay pro-risk to kick off 2025 but stand ready to dial down risk as catalysts emerge. Read our 2025 Global Outlook.

Market backdrop

U.S. stocks hit an all-time high last week. U.S. payrolls for November showed the economy is adding jobs at a healthy clip. Wage growth remains above the level that would allow inflation to settle at the Fed’s 2% target – a reason we do not see the Fed cutting rates sharply. U.S. 10-year Treasury yields slid to around 4.15%, down about 35 basis points in the past few weeks. Spreads between French and German 10-year yields edged off 12-year highs reached on France’s political stalemate.

This week we expect the ECB to cut interest rates by 25 basis points as euro area core inflation has kept normalizing. We’re monitoring the ECB’s updated growth and inflation projections as consumer spending shows signs of recovery. Yet fiscal consolidation and the potential impact of U.S. tariffs cloud the outlook. In the U.S., we watch for whether the November CPI will keep showing services inflation catching up with wage growth, keeping core inflation sticky.

Week ahead

The chart shows that gold is the best performing asset year-to-date among a selected group of assets, while Brent crude 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 Nov. 28, 2024. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (U.S., Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.

Dec. 2

Euro area unemployment

Dec. 3

U.S. job openings

Dec. 5

U.S. trade data

Dec. 6

U.S. payrolls

Read our past weekly commentaries here.

Big calls

Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, December 2024

  Reasons
Tactical  
U.S. equities We see the AI buildout and adoption creating opportunities across sectors. We tap into beneficiaries outside the tech sector. Robust economic growth, broad earnings growth and a quality tilt underpin our conviction and overweight in U.S. stocks versus other regions. We see valuations for big tech backed by strong earnings, and less lofty valuations for other sectors.
Japanese equities A brighter outlook for Japan’s economy and corporate reforms are driving improved earnings and shareholder returns. Yet the potential drag on earnings from a stronger yen is a risk.
Selective in fixed income Persistent deficits and sticky inflation in the U.S. make us more positive on fixed income elsewhere, notably Europe. We are underweight long-term U.S. Treasuries and like UK gilts instead. We also prefer European credit – both investment grade and high yield – over the U.S. on cheaper valuations.
Strategic  
Infrastructure equity and private credit We see opportunities in infrastructure equity due to attractive relative valuations and mega forces. We think private credit will earn lending share as banks retreat – and at attractive returns.
Fixed income granularity We prefer short- and medium-term investment grade credit, which offers similar yields with less interest rate risk than long-dated credit. We also like short-term government bonds in the U.S. and euro area and UK gilts overall.
Equity granularity We favor emerging over developed markets yet get selective in both. EMs at the cross current of mega forces – like India and Saudi Arabia – offer opportunities. In DM, we like Japan as the return of inflation and corporate reforms brighten the outlook.

Note: Views are from a U.S. dollar perspective, December 2024. 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

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, December 2024

Legend Granular

Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this. It leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. The new regime is not conducive to static exposures to broad asset classes, in our view, but it is creating more space for alpha. For example, the alpha opportunity in highly efficient DM equities markets historically has been low. That’s no longer the case, we think, thanks to greater volatility, macro uncertainty and dispersion of returns. The new regime puts a premium on insights and skill, in our view.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. The statements on alpha do not consider fees. Note: Views are from a U.S. 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, December 2024

Legend Granular

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, December 2024. 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
Jean Boivin
Head – BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Vivek Paul
Global Head of Portfolio Research – BlackRock Investment Institute
Ben Powell
Chief Investment Strategist for the Middle East and APAC — BlackRock Investment Institute