Tweaking our views yet staying risk on
Market take
Weekly video_20250210
Michel Dilmanian
Opening frame: What’s driving markets? Market take
Camera frame
US policy shifts and advances in artificial intelligence have driven dramatic market moves in 2025.
We stick to our core risk-on framework yet fine-tune our views.
Title slide: Tweaking our views yet staying risk on
1: Shifting US trade policy
We think tariffs will be a key US policy tool.
10% blanket tariffs plus 25% tariffs on Canada and Mexico would push the US effective tariff rate near 1930s levels.
2: Staying upbeat on US equities
Resilient growth, solid corporate earnings, potential deregulation and the AI theme are key reasons US equities can keep outperforming.
Q4 earnings have so far delivered the broadening of growth we expected.
3: Fine-tuning our fixed income views
Tariffs risk hurting euro area growth more than they would lift inflation, we think. This reinforces our preference for euro area government bonds.
In the UK, markets have moved closer to our view on lower Bank of England policy rates – and we think concerns about the fiscal outlook will linger.
Outro: Here’s our Market take
We stay overweight US equities on a solid macro backdrop and the AI theme.
We upgrade euro area government bonds to overweight on heightened tariff risks and we trim UK gilts to neutral.
Emerging markets look especially vulnerable to the growth hit from tariffs and any worsening in global risk sentiment. We go underweight EM local currency debt.
Closing frame: Read details: blackrock.com/weekly-commentary
Shifting US policy and the evolving artificial intelligence (AI) story highlight the risks markets face in 2025. We stay risk on and keep our US equity overweight.
US stocks were flat last week. Stocks recovered from the tariff-driven volatility thanks to solid Q4 corporate earnings, led by tech. US bond yields dipped.
The January US CPI is due this week. Wage growth remains above the level that would allow inflation to fall back to the Federal Reserve’s 2% target, we think.
US policy shifts and AI advances have driven sharp market volatility so far this year. This volatility underscores the fact we are in a new macro environment, with a wider range of outcomes possible. We stick to our core risk-on framework yet fine-tune our views. We stay overweight US equities on a solid macro outlook and the AI mega force – a big, structural shift. We go overweight government bonds in the euro area, where the potential growth hit from tariffs should reinforce rate cuts.
A potentially historic shift
US effective tariff rate, actual and potential, 1930-2025
Forward looking estimates may not come to pass. Source: BlackRock Investment Institute, US Bureau of Economic Analysis, with data from Haver Analytics, February 2025. Note: The chart shows the effective rate of tariffs on US imports. The yellow dot shows our estimate of the effective tariff rate if the US implemented a 10% tariff on all imports. The pink dot estimate adds the impact of a 25% tariff on imports from Canada and Mexico, on top of a blanket 10% tariff on all imports.
We entered 2025 expecting the unexpected and for policy to add volatility. That has played out. Bond yields spiked on fiscal concerns, then fell on growth fears and the US Treasury’s pledge to lower them. China startup DeepSeek’s seeming AI breakthrough and US tariff news have also stoked volatility. We think tariffs will be a key US policy tool. The US could pursue universal tariffs as a tax this week, with reports suggesting they could come as reciprocal tariffs matching those placed by other countries. We eye potential universal tariffs on a reciprocal basis or at a flat rate, such as 10%, with tariff levels of 25% serving as a negotiating tool. That could push the US effective tariff rate near 1930s levels. See the chart. The macro impact of tariffs depends on their level, scope, duration and any retaliation. The risk of higher inflation and lower growth likely keeps the Federal Reserve on hold for now.
US equities have proved resilient this year, though escalating trade tensions could keep the pressure on in coming months. We think they can keep doing so, even with rolling tariff headlines and the potential for 10% blanket tariffs – provided growth holds up and inflation stays in check. Resilient growth, solid corporate earnings, potential deregulation and the AI theme keep us upbeat. Q4 earnings growth has broadened as we expected, with S&P 500 earnings excluding the “magnificent 7” stocks up about 5% from a year ago and the consensus eyeing a 10% rise this year, LSEG Datastream data show. We keep our tactical US equity overweight yet watch for triggers for a change, such as earnings losing steam. We stay underweight long-term Treasuries. Even with the US Treasury saying it aims to lower long-term yields, we see them rising anew as large fiscal deficits and persistent inflation cause investors to demand more compensation for the risk of holding bonds.
Evolving our fixed income views
Tariff risks reinforce our preference for euro area government bonds, so we go tactically overweight. US President Donald Trump has signaled potential tariffs on Europe. Europe’s reliance on the US as an export destination means tariffs – and any retaliation – would hurt euro area growth more than it boosts inflation, in our view. In the UK, we cut our gilt allocation to neutral. We had expected more Bank of England rate cuts than markets were pricing. Recent volatility, especially revived fiscal concerns, pushed yields to 17-year highs. Yields have since retreated as we expected, providing a better exit point. Markets have moved closer to our view on BOE policy rates – and we think concerns about the UK fiscal outlook will linger.
Emerging markets are especially vulnerable to the growth hit from tariffs and any worsening in global risk sentiment, we think. Mexico, with its heightened exposure to tariff impacts, is a key constituent in emerging market bond local currency indexes. We prefer to express heightened risks through fixed income, where we go underweight emerging market local currency debt. Tariff uncertainty could also drive volatility in currency markets and hurt returns in local currency EM debt.
Our bottom line
We stay overweight US equities on a solid macro backdrop and the AI theme. We upgrade euro area government bonds, trim UK gilts to neutral and go underweight emerging market local currency debt.
Market backdrop
US stocks were flat last week. Risk assets slid after the US tariff plans before recovering by week’s end. Solid Q4 corporate earnings helped risk sentiment, with US big tech companies reporting solid results and increasing their AI buildout spending. US 10-year Treasury yields touched seven-week lows before settling near 4.50%. The US jobs data showed a strong economy is keeping demand for workers high and leading to a renewed rise in wage pressures.
We get US CPI for January this week. Even as December’s CPI report showed signs of inflation pressures easing, wage growth remains above the level that would allow inflation to recede back to the Federal Reserve’s 2% target, in our view. We see persistent services inflation forcing the Fed to keep rates higher for longer.
Week ahead
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 Feb. 6, 2025. Notes: The two ends of the bars show the lowest and highest returns at any point in the past 12 months, and the dots represent current 12-month returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns 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, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (US, 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.
US CPI
UK GDP
China total social financing
Read our past weekly commentaries here.
Big calls
Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, February 2025
Reasons | ||
---|---|---|
Tactical | ||
US 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 US 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 US make us more positive on fixed income elsewhere, notably Europe. We are underweight long-term US Treasuries and like euro area government bonds instead. We also prefer European credit – both investment grade and high yield – over the US on more attractive spreads. | |
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 US 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 US dollar perspective, February 2025. 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, February 2025
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.
Asset | Tactical view | Commentary | ||||
---|---|---|---|---|---|---|
Equities | ||||||
United States | We are overweight as the AI theme and earnings growth broaden. Valuations for AI beneficiaries are supported by tech companies delivering on earnings. Resilient growth and Fed rate cuts support sentiment. Risks include any long-term yield surges or escalating trade protectionism. | |||||
Europe | We are underweight relative to the US, Japan and the UK – our preferred markets. Valuations are fair. A growth pickup and European Central Bank rate cuts support a modest earnings recovery. Yet political uncertainty could keep investors cautious. | |||||
UK | We are neutral. Political stability could improve investor sentiment. Yet an increase in the corporate tax burden could hurt profit margins near term. | |||||
Japan | We are overweight. A brighter outlook for Japan’s economy and corporate reforms are driving improved earnings and shareholder returns. Yet a stronger yen dragging on earnings is a risk. | |||||
Emerging markets | We are neutral. The growth and earnings outlook is mixed. We see valuations for India and Taiwan looking high. | |||||
China | We are modestly overweight. China’s fiscal stimulus is not yet enough to address the drags on growth and tariff risks could hurt sentiment. But we see stocks as attractively valued versus DMs. We stand ready to pivot. We are cautious long term given structural challenges. | |||||
Fixed income | ||||||
Short US Treasuries | We are neutral. Markets are pricing in fewer Federal Reserve rate cuts and their policy rate expectations are now roughly in line with our views. | |||||
Long US Treasuries | We are underweight. Persistent budget deficits and geopolitical fragmentation could drive term premium up over the near term. We prefer intermediate maturities less vulnerable to investors demanding more term premium. | |||||
Global inflation-linked bonds | We are neutral. We see higher medium-term inflation, but cooling inflation and growth may matter more near term. | |||||
Euro area government bonds | We are overweight. Trade uncertainty may hurt euro area growth more than it boosts inflation, potentially allowing the European Central Bank to cut rates more. Political uncertainty remains a risk to fiscal sustainability. | |||||
UK Gilts | We are neutral. Gilt yields are off their highs, but the risk of higher US yields having a knock-on impact and reducing the UK’s fiscal space has risen. We are monitoring the UK fiscal situation. | |||||
Japan government bonds | We are underweight. Stock returns look more attractive to us. We see some of the least attractive returns in JGBs. | |||||
China government bonds | We are neutral. Bonds are supported by looser policy. Yet we find yields more attractive in short-term DM paper. | |||||
US agency MBS | We are neutral. We see agency MBS as a high-quality exposure in a diversified bond allocation and prefer it to IG. | |||||
Short-term IG credit | We are overweight. Short-term bonds better compensate for interest rate risk. | |||||
Long-term IG credit | We are underweight. Spreads are tight, so we prefer taking risk in equities from a whole portfolio perspective. We prefer Europe over the US | |||||
Global high yield | We are neutral. Spreads are tight, but the total income makes it more attractive than IG. We prefer Europe. | |||||
Asia credit | We are neutral. We don’t find valuations compelling enough to turn more positive. | |||||
Emerging market - hard currency | We are neutral. The asset class has performed well due to its quality, attractive yields and EM central bank rate cuts. We think those rate cuts may soon be paused. | |||||
Emerging market - local currency | We are underweight. We see emerging market currencies as especially sensitive to trade uncertainty and global risk sentiment. |
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, February 2025
Asset | Tactical view | Commentary | ||
---|---|---|---|---|
Equities | ||||
Europe ex UK | We are underweight relative to the US and Japan, which remain our preferred markets. Valuations are fair. A growth pickup and European Central Bank rate cuts support a modest earnings recovery. Yet geopolitical tensions, domestic political uncertainty, potential tariffs, and fading optimism about China’s stimulus could weigh on investor sentiment. | |||
Germany | We are underweight. Valuations and earnings momentum offer modest support compared to peers, especially as ECB rate cuts ease financing conditions. Prolonged uncertainty over the next government, potential tariffs, and fading optimism about China’s stimulus could dampen sentiment. | |||
France | We are underweight. The outcome of France’s parliamentary election and ongoing political uncertainty could weigh on business conditions for French companies. Yet, only a small share of the revenues and operations of major French firms is tied to domestic activity. | |||
Italy | We are underweight. Valuations are supportive relative to peers, but past growth and earnings outperformance largely stemmed from significant fiscal stimulus in 2022-2023, which is unlikely to be sustained in the coming years. | |||
Spain | We are neutral. Valuations and earnings momentum are supportive compared to other euro area stocks. The utilities sector stands to gain from an improving economic backdrop and advancements in AI. | |||
Netherlands | We are underweight. The Dutch stock market’s tilt to technology and semiconductors—key beneficiaries of rising AI demand—is offset by less favorable valuations and a weaker earnings outlook compared to European peers. | |||
Switzerland | We are underweight, consistent with our broader European view. Earnings have improved, but valuations remain elevated compared to other European markets. The index’s defensive tilt may offer less support if global risk appetite stays strong. | |||
UK | We are neutral. Political stability could improve investor sentiment. Yet an increase in the corporate tax burden could hurt profit margins near term. | |||
Fixed income | ||||
Euro area government bonds | We are neutral. Market pricing aligns with our policy rate expectations, and 10-year yields have retreated from their highs. Political uncertainty poses risks to fiscal sustainability, but select peripheral markets are bolstered by stronger growth and improving credit ratings. | |||
German bunds | We are neutral. Market pricing aligns with our policy rate expectations, and 10-year yields have eased from their highs, partly due to growth concerns. We are watching the fiscal flexibility debate ahead of upcoming elections. | |||
French OATs | We are neutral. France faces challenges from elevated political uncertainty, persistent budget deficits, and a slower pace of structural reforms. The EU has already warned the country for breaching fiscal rules, and its sovereign credit rating was downgraded earlier this year. | |||
Italian BTPs | We are neutral. The spread over German bunds looks tight given its budget deficits and debt profile, prompting a warning from the EU. Other domestic factors remain supportive, with growth holding up relative to the rest of the euro area and Italian households showing solid demand to hold BTPs at higher yields. | |||
UK gilts | We are overweight. Gilt yields offer attractive income, and we think the Bank of England will cut rates more than the market is pricing given a soft economy. But we are monitoring any government response to the recent fiscal concerns. | |||
Swiss government bonds | We are neutral. The Swiss National Bank has cut policy rates this year as inflationary pressures eased but is unlikely to reduce rates significantly further. | |||
European inflation-linked bonds | We are neutral. We see higher medium-term inflation, but cooling inflation and sluggish growth may matter more near term. | |||
European investment grade credit | We are neutral on European investment grade credit, favoring short- to medium-term paper for quality income. We prefer European investment grade over the US, as spreads are relatively wider. | |||
European high yield | We are overweight. The income potential is attractive, and we prefer European high yield for its more appealing valuations, higher quality, and shorter duration compared to the US. In our view, spreads adequately compensate for the risk of a potential rise in defaults. |
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, February 2025. 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.
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