Global Weekly Commentary - Getting Started

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 US still standing out versus other developed markets thanks to stronger economic growth and its ability to capitalise on mega forces. We recognize some US 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 US stocks overweight as we see beneficiaries broadening.

Market backdrop

US stocks hit new highs last week. November’s US 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. US 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 US equity overweight as the AI theme broadens out – but stand ready to dial down risk.

Market commentary Asset class views

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Ever-bigger share

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

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 capitalisation (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 capitalisation. 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 US stocks as we expect AI beneficiaries to broaden out beyond tech. We’re also confident US equities can keep outpacing global peers given the ability to better capitalise 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 US 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

US 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 US 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 US 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

US stocks hit an all-time high last week. US 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. US 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 normalising. 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 US tariffs cloud the outlook. In the US, 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 US equities are the best performing assets 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 Dec. 5, 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 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.

Dec. 9

China CPI and PPI

Dec. 10

China trade data

Dec. 11

US CPI

Dec. 12

European Central Bank (ECB) policy decision

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
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 UK gilts instead. We also prefer European credit – both investment grade and high yield – over the US 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 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 our outlook.

Note: Views are from a US 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

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.

Search views

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 economic growth, but we think stocks are at attractive valuations to DM shares. We stand ready to pivot. We are cautious long term given China’s 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 neutral. Market pricing reflects policy rates in line with our expectations and 10-year yields are off their highs. Political uncertainty remains a risk to fiscal sustainability.
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.
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 neutral. Yields have fallen closer to US Treasury yields, and EM central banks look to be turning more cautious after cutting policy rates sharply.

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 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, December 2024

Search views

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.
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, 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.

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

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Weekly market commentary

Staying pro-risk into 2025

Ever-bigger share

Harnessing the transformation

Our bottom line

Market backdrop

Week ahead

Big calls

Tactical granular views

Euro-denominated tactical granular views

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