Q2 2025 Investment Outlook | BlackRock Investment Institute

Q2 2025 INVESTMENT OUTLOOK

April 29, 2025 | We have long argued that the global economy is undergoing a profound transformation driven by mega forces. That is now being accelerated by U.S. policy shifts.

Read our Q2 outlook (PDF) Read our Q2 outlook (PDF)

Key takeaways

01

An accelerated transformation

We see the global economy’s profound transformation driven by mega forces accelerating. Geopolitical fragmentation and the future of finance are now colliding.
02

Binding economic rules

Macro policy is now more disruptive. Yet we see hard economic rules binding on abrupt U.S. policy changes. That keeps us pro-risk on a tactical horizon.
03

Big investment questions

The transformation underway blurs the line between short- and long-term investment views. This raises big questions such as how to harness the transformation.

Read details of our Q2 outlook:

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An accelerated transformation

We have long argued that the global economy is undergoing a profound structural transformation driven by mega forces, such as geopolitical fragmentation. Abrupt changes to U.S. trade policy are accelerating the transformation already underway. Sweeping U.S. tariffs, if fully implemented, would push the effective tariff rate to the highest level since at least the 1930s – see the chart below – with the steepest tariffs targeted at imports from China.

U.S. effective tariff rate, 1900-2025

Forward looking estimates may not come to pass. Source: BlackRock Investment Institute, U.S. Bureau of Economic Analysis, Historical Statistics of the United States, with data from Haver Analytics, April 2025. Note: The chart shows the effective rate of tariffs on U.S. imports and the dot shows our estimates of the effective tariff rate in different scenarios.

Binding economic rules

These U.S. policy shifts are now bumping up against economic rules that put bounds on the realms of what’s possible, notably tied to U.S. debt financing and supply chains. We track those rules, not each policy twist.

One such rule: Global supply chains can’t rewire quickly without major disruption. Recent U.S. trade updates show how this rule is starting to bind as negotiations take shape. China is a key supplier of critical minerals, semiconductors, industrial parts and auto parts, U.S. Census data show. That means tariffs could up costs, cut access to key inputs and halt production.

These economic rules are we see U.S. policy settling down on our tactical six- to 12-month horizon even as we expect more near-term volatility. We stay positive on developed market (DM) stocks.

Big investment questions

This unusual backdrop challenges traditional investing and raises big questions about the trajectory for global markets. How will the role of U.S. Treasuries in portfolios evolve? It’s one of the big questions arising from the recent collision of two mega forces: geopolitical fragmentation and the future of finance.

Long-term U.S. government bonds – a traditional cushion to falling stocks – have not recently provided portfolio ballast. And the U.S. dollar slid against major currencies during the U.S. risk asset selloff in April. That’s unusual compared with previous episodes. Investors are reassessing the haven status of the U.S. dollar, in our view.

Meanwhile, gold has surged to record highs as investors seek alternatives. See the chart below. We think gold will play a bigger role as a portfolio diversifier.

Asset performance during S&P 500 selloffs

The figures shown relate to past performance. 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 Bloomberg, April 2025. Note: The lines show the performance of the various “haven” assets during S&P 500 selloffs. The average performance during other selloffs takes the average through 21 S&P 500 selloffs from 1987 onward. Data for the selloff “Since April 2” runs until April 21. Index proxies used: the U.S. Federal Reserve’s Nominal Advanced Foreign Economics U.S. Dollar Index for the U.S. dollar, Bloomberg U.S. Long Treasury Total Return index for Long-term U.S. Treasuries.

Other big questions: How to invest with a shifting market makeup? What’s the best way to harness an economic transformation? Will investors stick to domestic markets? Does locking up capital for longer work today?

Today’s highly concentrated stock market may reflect the AI mega force at play. Yet concentration can be a risk too. We think that reinforces why investors should be even more deliberate with risk-taking. Capturing market shifts during periods of transformation could deliver greater potential returns. We believe today’s transformation lends itself to more granular investing, particularly across sectors. The mega forces fueling the transformation boost demand for private capital, in our view. Yet interest rates settling above pre-pandemic levels may potentially challenge future returns from private markets.

Learn more about our big calls for 2025. Explore the Asset class views tab above.

	Reasons
Tactical		Reasons
U.S. equities	ReasonsPolicy uncertainty and supply disruptions are weighing on near-term growth, raising the risk of a contraction. Yet we think U.S. equities will regain global leadership as the AI theme keeps providing near-term earnings support and could drive productivity in the long term.
Japanese equities	ReasonsWe are overweight. Ongoing shareholder-friendly corporate reforms remain a positive. We prefer unhedged exposures given the yen’s potential strength during bouts of market stress.
Selective in fixed income	ReasonsPersistent deficits and sticky inflation in the U.S. make us underweight long-term U.S. Treasuries. We also prefer European credit – both investment grade and high yield – over the U.S. on more attractive spreads.
Strategic		Reasons
Infrastructure equity and private credit	ReasonsWe 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	ReasonsWe prefer short-term inflation-linked bonds over nominal developed market (DM) government bonds, as U.S. tariffs could push up inflation. Within DM government bonds, we favor UK gilts over other regions.
Equity granularity	ReasonsWe favor emerging over developed markets yet get selective in both. Emerging markets (EM) at the cross current of mega forces – like India – offer opportunities. In DM, we like Japan as the return of inflation and corporate reforms brighten the outlook.
Comments
Note: Views are from a U.S. dollar perspective, June 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.

Showing 1 to 8 of 8 entries

Asset	Tactical view	Commentary
AssetEquities	Tactical view	Commentary
AssetUnited States	Tactical view	CommentaryWe are overweight. Policy-driven volatility and supply-side constraints are pressuring growth, but we see AI supporting corporate earnings in the near term and driving productivity over the long run.
AssetEurope	Tactical view	CommentaryWe are neutral, preferring the U.S. and Japan. We see structural growth concerns and uncertainty over the impacts of rising defense spending, fiscal loosening and de-escalation in Ukraine. Yet room for more European Central Bank rate cuts can support an earnings recovery.
AssetU.K.	Tactical view	CommentaryWe are neutral. Political stability could improve investor sentiment. Yet an increase in the corporate tax burden could hurt profit margins near term.
AssetJapan	Tactical view	CommentaryWe are overweight given the return of inflation and shareholder-friendly corporate reforms. We prefer unhedged exposure as the yen has tended to strengthen during bouts of market stress.
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 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.

Asset	Tactical view	Commentary
AssetEquities	Tactical view	Commentary
Asset Europe ex UK	Tactical view	CommentaryWe are neutral, preferring the U.S. and Japan. We see structural growth concerns and uncertainty over the impacts of rising defense spending, fiscal loosening and de-escalation in Ukraine. Yet room for more European Central Bank rate cuts can support an earnings recovery.
AssetGermany	Tactical view	CommentaryWe are neutral. Valuations and earnings growth are supportive relative to peers, especially as ECB rate cuts ease financing conditions. Prolonged uncertainty about potential tariffs and fading euphoria over China’s stimulus could dent sentiment.
AssetFrance	Tactical view	CommentaryWe are neutral. 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.
AssetItaly	Tactical view	CommentaryWe are neutral. Valuations are supportive relative to peers. Yet past growth and earnings outperformance largely stemmed from significant fiscal stimulus in 2022-2023, which is unlikely to be sustained in the coming years.
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, June 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.

Macro policy is now more disruptive and less of a stabilizer

Since late 2024, we saw macro policy becoming a potential source of disruption – and we think that’s come to pass. Jarring U.S. economic policy shifts – particularly in trade – has brought unprecedented uncertainty.

U.S. trade policy uncertainty index, 1985-2025

Source: BlackRock Investment Institute, with data from Matteo Iacoviello and LSEG Datastream, April 2025. Note: The Trade Policy Uncertainty (TPU) Index is based on automated text searches of the electronic archives of seven newspapers. The measure is calculated by counting the monthly frequency of articles discussing trade policy uncertainty (as a share of the total number of news articles) for each newspaper. The index is normalized to a value of 100 for a 1% article share.

U.S. economic policy uncertainty index, 1985-2025

Source: BlackRock Investment Institute, Economic Policy Uncertainty, with data from LSEG Datastream, April 2025. Note: The line shows the 30-day average of the economic policy uncertainty index. The index automated text searches of newspaper archives (measuring the frequency of policy-related uncertainty articles), the number of federal tax code provisions set to expire and disagreement among professional economic forecasters. The index is normalized with higher values indicating greater uncertainty. See https://www.policyuncertainty.com/methodology.html for more.

Sustained uncertainty can create permanent damage

Britain’s exit from the European Union serves as a recent example of how sustained uncertainty can create permanent damage to an economy. Elevated uncertainty dented UK investment relative to the U.S. and the euro area.

Capital investment, 2015-2024

Source: BlackRock Investment Institute, U.S. Bureau of Economic Analysis, Eurostat, UK Office of National Statistics, with data from Haver Analytics, April 2025. Note: The lines show the total fixed capital formation – a value of real physical investment – for the U.S., euro area and UK.

We share our insights on the fast-moving developments of U.S. trade protectionism, the world's response and what it means for financial markets and our investment views.

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