Record U.S. stocks: disconnect or not?
Market take
Weekly video_20260511
Ehsan Khoman
Economist
BlackRock Investment Institute
Header:
CAPITAL AT RISK. MARKETING MATERIAL.
Opening frame: What’s driving markets? Market take
Camera frame
Title slide: U.S. stocks: disconnect or not?
U.S. equities are hitting new highs even as the Strait of Hormuz remains effectively closed, deepening supply chain disruptions. We think markets are pricing in both an AI-driven earnings boost and the impact of those disruptions – not signaling a disconnect.
1. No market disconnect
With U.S. stock indexes pushing to new highs, a common narrative is that markets are disconnected. Equities and credit are both holding firm even as oil, commodities and yields rise. We disagree.
Outside the U.S., we are seeing sharp dispersion across regional and sector stock performance that fit this picture. In the U.S., Earnings expectations have surged, with expected S&P 500 earnings growth in the first quarter doubling to 28% since the start of April.
Even regions that are vulnerable to the energy disruptions are powering ahead due to the AI theme, such as parts of Asia.
2. Yields reflect the shock
Supply chain disruptions have pushed up energy costs, adding to already sticky inflation that’s pushed up government bond yields as a result.
Higher yields come as we see heightened demand for capital, adding to upward pressure on interest rates. Lots of that is tied to the capital-intensive AI buildout and the rebuilding of key infrastructure.
3. Fragilities exposed by supply disruptions
Our pro-risk stance is unchanged, and we stay overweight U.S. and emerging market equities. We’re underweight long-term U.S. government bonds, favoring short- and medium-term Treasuries for income.
But a prolonged closure to the Strait of Hormuz that keeps energy flows disrupted would likely shift the balance. It would lift inflation and interest rates enough to start weighing on equity valuations and tighten financial conditions.
Outro: Here’s our Market take
We see no disconnect between record U.S. equity prices and elevated oil, commodities and bond yields. Markets are pricing both AI-driven growth and the impact of the Middle East supply shock. We stay pro-risk for now.
Closing frame:
Read details: blackrock.com/weekly-commentary
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No market disconnect
We see no disconnect between record U.S. equities and high oil and yields: Markets are pricing both AI-driven growth and the Middle East supply shock.
Market backdrop
U.S. equities hit record highs last week, while oil and yields stayed elevated —reinforcing our view that markets are differentiating the shock’s impact.
Week ahead
U.S. inflation data this week will test still-firm price pressures, with implications for yields as markets assess the risk of further rate increases.
U.S. stocks hit record highs even as the effective closure of the Strait of Hormuz disrupts global supply chains. A common narrative is that markets are disconnected as equities and credit hold firm while oil, commodities and yields rise. We see no inconsistency. The AI buildout is offsetting the shock’s drag on growth, while energy markets still appear to be pricing eventual reopening of the Strait. That leaves inflation and higher yields as the key risk to our pro-risk stance.
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Mideast shock creates dispersion
Equities performance relative to MSCI World since Mideast conflict
Source: BlackRock Investment Institute with data from LSEG Datastream, May 2026. Bars show the relative performance vs. the MSCI World since Feb. 27, just before the start of the Middle East conflict. Positive values indicate outperformance.
Emerging market and U.S. equities are leading global markets since the start of the Middle East conflict on strong AI-linked earnings. See the chart’s left set of bars. Countries exposed to the shock have lagged, while those tied to the AI boom, such as South Korea and Taiwan, have outperformed (middle set of bars). Sector trends tell a similar story, with AI-linked industries driving gains and inflation-exposed areas such as materials underperforming (right set of bars). Policy expectations have been moving in the same direction. Markets are now pricing in about three rate hikes in Europe as inflation pressures build, whereas no change is expected in the U.S. And U.S. credit spreads are below pre-conflict levels, underscoring markets are not pricing in much economic damage. Conclusion: These patterns suggest that markets are pricing in earnings strength and the supply shock’s fallout to date.
The resilience in U.S. equities reflects the scale and breadth of the AI buildout. Expected S&P 500 earnings growth for the first quarter has climbed to about 28%, roughly double early-April levels, while MSCI EM tech earnings growth expectations have surged to around 160%. This strength is being reinforced by an emerging AI-driven cybersecurity arms race, sustaining demand for compute, cloud infrastructure and advanced models. The numbers are staggering. The “magnificent seven” are tracking a 57% jump in quarterly earnings (with Nvidia yet to report), three times higher than Bloomberg estimates just last month. Capital spending is now estimated to reach as much as $725 billion this year, up some 10% from before earnings.
A strengthening AI mega force
The AI built-out has so far outweighed the typical effect of a macro shock: a drag on growth and earnings that hurts equities. That leaves interest rates as the key mechanism through which the shock could challenge risk assets. Higher energy and input costs are adding to already sticky inflation, with a more pronounced impact in Europe because of its greater exposure. At the same time, the AI buildout is increasing demand for capital—not only for technology infrastructure, but also for energy security and broader infrastructure rebuilding amid geopolitical fragmentation. Capital that previously flowed to the U.S. is increasingly being diverted to these needs, raising competition for funding and adding to upward pressure on long-term yields. Equity markets are balancing growth against rates: Strong enough earnings growth can offset higher yields, as seen in the AI-driven surge since the launch of ChatGPT. The risk: If disruptions persist, the combined effect of higher inflation and rising capital demand could push yields high enough to weigh on valuations.
We stay pro-risk for now, overweighting U.S. and EM equities as beneficiaries of the AI buildout and commodity exports. We prefer equities over bonds and remain underweight long-term U.S. Treasuries, instead favoring short- and medium-term bonds for income. This stance is dependent on eventual normalization in the Strait of Hormuz even as there are still no signs of a reopening. A prolonged closure would likely shift the balance. It would lift inflation and rates enough to start weighing on valuations and tighten financial conditions, ultimately challenging both risk assets and the pace of the AI buildout.
Our bottom line
We see no disconnect between record U.S. equities prices and elevated oil, commodities and yields. Markets are pricing both AI-driven growth and the impact of the Middle East supply shock. We stay pro-risk as a result.
Market backdrop
U.S. equities pushed to record highs last week, led by tech as strong earnings and intermittent hopes of de-escalation in the Middle East supported risk appetite. The broader market picture was more uneven. Europe lagged and more energy-sensitive sectors came under pressure as higher input costs began to bite, while oil prices and bond yields remained elevated. This divergence highlights how markets are absorbing the shock: Equity performance is supported by resilient growth and AI-driven earnings, even as commodities and rates reflect the risk of a more prolonged disruption to global supply chains.
This week we watch for inflation data. U.S. price pressures through CPI are expected to stay firm, with signs that core inflation may rise further. PPI will show whether higher costs for goods and energy are still passing through. In China, consumer prices are expected to stay weak, while factory prices are rising, showing better pricing in industry but still weak demand at home. Together, the data will show how strong inflation pressures remain.
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 May 7, 2026. Notes: The two ends of the bars show the lowest and highest res at any point year to date, and the dots represent current year-to-date res. Emerging market (EM), high yield and global corporate investment grade (IG) res 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.
May 11
China CPI and PPI
May 12
U.S. CPI
May 13
U.S. PPI; Euro area flash GDP and employment
May 14
UK GDP
Big calls
Our highest conviction views on six- to 12-month (tactical) and over five-year (strategic) horizons, May 2026
| Reasons | ||
|---|---|---|
| Tactical | ||
| Favor AI beneficiaries | We favor infrastructure and equipment supporting the AI buildout such as semiconductors, power and data centers. We think they stand to benefit no matter AI’s eventual winners or losers. We see the AI boom lifting U.S. corporate earnings. underpinning our U.S. equity overweight. | |
| Selected international exposures | We like hard-currency EM debt on economic resilience, disciplined fiscal and monetary policy and a high ratio of commodities exporters. We’re also overweight EM equities, preferring commodity exporters and AI beneficiaries. In Europe, we favor equity sectors like infrastructure. | |
| Evolving diversifiers | We suggest looking for “plan B” portfolio hedges such as thematic opportunities related to the AI built-out and search for energy security. Long-term U.S. Treasuries no longer provide a buffer against equity market declines, and gold also has shown to be an ineffective diversifier. | |
| Strategic | ||
| Portfolio construction | We favor a scenario-based approach as AI winners and losers emerge. We lean on private markets and hedge funds for idiosyncratic returns and to anchor portfolios in mega forces. | |
| Infrastructure equity and private credit | We find infrastructure equity valuations attractive as geopolitical fragmentation and the AI build-out underpin structural demand. We still like private credit but see an increase in dispersion of returns. This highlights the importance of manager selection. | |
| Beyond market cap benchmarks | We get granular in public markets. We favor DM government bonds outside the U.S. Within equities, we favor EM over DM – and get selective in both. In EM, we like India because it sits at the intersection of mega forces. In DM, we like Japan amid inflation and corporate reforms. | |
Note: Views are from a U.S. dollar perspective, May 2026. 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 table
Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, May 2026
We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility.
Granular views
Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, May 2026
| Asset | Tactical view | Commentary | ||||
|---|---|---|---|---|---|---|
| Equities | ||||||
| United States |  |
We are overweight. Contained damage to global growth from the Mideast conflict and strong earnings expectations – particularly in tech – keep us risk-on. | ||||
| Europe |  |
We are neutral. Europe’s high exposure to the energy shock from the Mideast conflict makes it vulnerable to higher inflation and lower growth. | ||||
| UK | |
We are neutral. Valuations remain attractive relative to the U.S., but we see few near-term catalysts to trigger a shift. | ||||
| Japan | |
We are neutral. Japan’s exposure to imported energy may erode strong equity gains powered by healthy corporate balance sheets and governance reforms. | ||||
| Emerging markets (EM) | |
We are overweight yet stay selective. We favor Asian countries that manufacture critical AI components and Latin American energy and commodity exporters. | ||||
| China | |
We are neutral. Trade relations with the U.S. have steadied, but property stress and an aging population still constrain the macro outlook. Relatively resilient activity limits near-term policy urgency. We like sectors like AI, automation and power generation. | ||||
| Fixed income | ||||||
| Short U.S. Treasuries | |
We are neutral. Shorter-term bonds are relatively attractive as the market has woken up to persistent inflation and higher rates. | ||||
| Long U.S. Treasuries |  |
We are underweight. Yields already faced upward pressure from rising term premia, as investors demand more compensation for the risk of holding long-term debt. The recent energy price shock compounds this by aggravating pre-existing inflationary pressures. | ||||
| Global inflation-linked bonds | |
We are neutral. We think inflation will settle above pre-pandemic levels, but markets may not price this in the near term as growth cools. | ||||
| Euro area government bonds | |
We are neutral short-term European government bonds. The market has repriced the ECB policy path more in line with our view. We think increased German bond issuance to finance its fiscal stimulus package is already largely reflected in the current level of 10-year yields. | ||||
| UK gilts | |
We are neutral. We expect volatility in gilts over the near-term. Gas powers much of the UK’s electricity, but storage is limited – making it especially vulnerable to a resurgence in inflation. | ||||
| Japanese government bonds |  |
We are underweight. Rate hikes, higher global term premium and heavy bond issuance will likely drive yields up further. | ||||
| China government bonds | |
We are neutral. China bonds offer stability and diversification but developed market yields are higher and investor sentiment shifting towards equities limits upside. | ||||
| U.S. agency MBS | |
We are overweight. Agency MBS offer higher income than Treasuries with similar risk, and may offer more diversification amid fiscal and inflationary pressures. | ||||
| Short-term IG credit | |
We are neutral. Corporate strength means spreads are low, but they could widen if issuance increases. | ||||
| Long-term IG credit | |
We are underweight. We prefer short-term bonds less exposed to interest rate risk over long-term bonds. | ||||
| Global high yield | |
We are neutral. High yield offers more attractive carry and shorter duration, but we think dispersion between higher and weaker issuers will increase. | ||||
| Asia credit | |
We are neutral. Overall yields are attractive and fundamentals are solid, but spreads are tight. | ||||
| Emerging hard currency | |
We are overweight. EM hard-currency indexes lean toward Latin American commodity exporters such as Brazil that stand to benefit as Mideast supply plummets. | ||||
| Emerging local currency | |
We are neutral. The U.S. dollar has been strengthening as a safe-haven currency in the wake of the Middle East conflict. This could reverse year-to-date gains driven by a falling USD. | ||||
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.
Meet the Authors
Jean Boivin
Head – BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Beata Harasim
Senior Investment Strategist – BlackRock Investment Institute
Ehsan Khoman
Economist — BlackRock Investment Institute
