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Mega forces the new long-term anchor

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Market take

Weekly video_20250811

Devan Nathwani

Portfolio Strategist, BlackRock Investment Institute

Opening frame: What’s driving markets? Market take

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The surging AI investment in recent tech earnings shows that mega forces are key drivers of returns. Yet no one knows the long-term outcomes of the transformation these mega forces are powering. That’s why we use multiple scenarios – not just one – in our strategic views.

Title slide: Mega forces the new long-term anchor

1: Unanswered questions

This mega force-powered transformation raises lots of questions about long-term asset allocation. Will fiscal worries spur investors to demand more term premium, or compensation to hold long-term government bonds? Will the U.S. dollar stay a haven? It takes constant tracking to see how mega forces will shape the answers to these questions.

2: Three possible scenarios

That’s why we’ve developed three sets of long-run capital markets assumptions. One scenario: AI boosts productivity, unlocks higher growth and softens inflation. We’d expect strong equity performance, with U.S. outperformance.

Another scenario: a geopolitical downside, where tariff negotiations fail, trust in U.S. institutions falls and investors demand more compensation for the risk of financing U.S. companies.

Our current strategic views are informed by our starting point scenario that largely reflects today’s world due to binding immutable economic laws limiting how fast the world can change.

We see U.S. assets staying at the core, growth dipping below pre-pandemic levels, inflation staying elevated and investors demanding more term premium.

3: Private markets as a cornerstone

In all three scenarios, we see private markets as a cornerstone allocation – not an add-on – that can help investors capture intersecting mega forces. We particularly like private credit and infrastructure.

Outro: Here’s our Market take

No one knows where mega forces will take the global economy. That reality changes strategic investing. We use scenarios to help us adjust quickly – but think private markets should be a core allocation no matter the outcome.

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

Multiple scenarios

We use multiple scenarios in our strategic views to help us adapt portfolios fast as today’s economic transformation unfolds. We like private markets across all.

Market backdrop

U.S. stocks climbed back near all-time highs as Q2 earnings keep beating expectations. European stocks outperformed on hopes for a Ukraine ceasefire.

Week ahead

We watch U.S. CPI for tariff impacts broadening out and any signs of slowing growth easing services inflation.

Mega forces are shaping an economic transformation with an unknown end. We won’t have answers for some time to big questions about the future shape of the world, making long-term investing more challenging. That’s why we’ve evolved our approach to now assess scenarios instead of one base case. Our starting point scenario is broadly the status quo: immutable economic laws mean the world can’t change quickly. We see private markets as a core allocation across scenarios.

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Tech leading the way
Contribution of non-residential investment to annual U.S. GDP, 1960-2025

The chart shows software and IT equipment's contribution to annual U.S. GDP growth versus other forms of non-residential investment. That contribution is higher today even than in the dot-com boom of the 1990s.

Source: BlackRock Investment Institute, U.S. Bureau of Economic Analysis, with data from Haver Analytics, July 2025. Note: The bars show the contribution of non-residential investment to annual U.S. GDP growth. The bar for 2025 shows the contribution through the first half of 2025 on an annualized basis.

The global transformation shaped by artificial intelligence (AI) and other mega forces raises some big questions about strategic asset allocation. Will fiscal worries spur investors to demand more compensation to hold long-term government bonds? Will the U.S. dollar stay a haven? We may not be able to answer all of these for a while. But two things we know that can inform our strategic views today: immutable laws – like supply chains can’t rewire overnight – mean the world can’t change quickly, and mega forces are now the key anchor shaping returns now and long term given the many unknowns of the macro outlook. An example? Big tech companies are boosting their AI investment even as tariffs threaten growth. The surge in tech and software spending in U.S. Q2 GDP – even larger than during the 1990s tech boom – highlights the AI theme’s growing macro impact. See the chart.

This all feeds into the new way in which we now think about strategic investing on horizons of five years and beyond. Transformation means long-term macro anchors like stable growth and low inflation no longer hold. Strategic outcomes are now less predictable because investors can no longer assume returns will converge to historical averages. Given the range of vastly different potential outcomes, we think determining strategic views on a base case – one that is tweaked over time – is no longer sufficient. Instead, we have developed multiple sets of long-run capital market assumptions (for professional investors) to help us adjust quickly as the future comes into view.

Multiple scenarios

One scenario is an AI upside: faster-than-expected AI adoption spurs a broad productivity boost, unlocking higher growth and softer inflation. We’d expect strong performance in equities, with U.S. outperformance thanks to its AI leadership and the resulting corporate earnings strength. Another scenario: a downside due to geopolitical reordering where tariff negotiations fail, trust in U.S. institutions declines and investors demand more compensation for their risk in financing U.S. corporates.

Yet we still need a best guess of what the world will look like in five years to build portfolios now. Immutable laws limit how fast the global financial structure can change, so our current strategic views are informed by our starting point scenario that largely reflects today’s world. In this scenario, U.S. assets stay core to portfolios; inflation stays above central bank targets; global growth dips below pre-pandemic trend; and investors want more term premium to hold long-term government bonds. We go underweight global investment grade credit in favor of non-U.S. government bonds due to tighter credit spreads. We like emerging market equities, particularly India, which sits at the crosscurrent of several mega forces. We’ve long liked private markets to capture mega forces, especially private credit as part of the future of finance and infrastructure. We see them as a cornerstone – not an add-on – in all scenarios, but the mix varies. Private markets are not suitable for all investors.

Our bottom line

Mega forces are driving a transformation with an unknown end – changing strategic investing. We consider scenarios to help us adapt quickly but see private markets helping investors benefit from mega forces across outcomes.

Note: The Global weekly commentary will resume on Tuesday, Sept. 2.

Market backdrop

U.S. stocks pushed back toward all-time highs, with the S&P 500 gaining about 2% on the week and tech shares outperforming. A solid Q2 earnings season has provided investors some relief: about 80% of companies have beat expectations, according to LSEG data. European stocks outperformed on hopes for a ceasefire in Ukraine. U.S. Treasury yields edged up over the week. Markets are mostly pricing in a quarter-point Federal Reserve rate cut at its September meeting.

This week, we’re watching U.S. core goods CPI to see if tariffs – already nudging prices up in some sectors – are starting to raise prices across a wider set of goods. More broadly, we watch for any signs that slower growth – as reflected in the latest U.S. payrolls data – is easing core services inflation.

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 August 7, 2025. 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, spot bitcoin, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (U.S., Germany and Italy), Bloomberg Global High Yield Index, J.P. Morgan EMBI Index, Bloomberg Global Corporate Index and MSCI USA Index.

Aug. 12

U.S. CPI, UK unemployment

Aug. 14

UK GDP

Aug. 15

US retail sales, Japan GDP

Aug. 8-15

China July CPI

Read our past weekly market commentaries here.

 

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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
Devan Nathwani
Portfolio Strategist – BlackRock Investment Institute