Two market signals, one story
Market take
Weekly video_20260810
Devan Nathwani
Portfolio Strategist
BlackRock Investment Institute
Header:
CAPITAL AT RISK. MARKETING MATERIAL.
Opening frame: What’s driving markets? Market take
Camera frame
Title slide: Two market signals, one story
Rapidly rising earnings forecasts alongside higher long-term bond yields are not contradictory signals. We think they're telling the same story: structural forces are reshaping markets, supporting earnings and keeping the cost of capital higher.
1: Beyond a normal business cycle
Today's market isn't following the usual business cycle.
Five years after the last economic downturn, analysts are still raising earnings forecasts. In the past, earnings growth typically stalled and then contracted every four to six years.
We see that as evidence that structural forces are reshaping markets. For example, the AI buildout is boosting productivity and profit margins, while supply scarcity is changing how capital is deployed across the economy. Those forces are changing how we think about long-term investing.
2: Higher cost of capital
But the same forces supporting earnings are also pushing bond yields higher.
Governments, AI hyperscalers and companies are all competing more intensely for capital. Combined with inflation uncertainty, we think investors will keep demanding more compensation for holding long-term government bonds, or term premium.
That's why we see structurally higher cost of capital.
3: Positioning portfolios
We’ve argued that this environment calls for a different approach to portfolio construction. The industry’s growing focus on the total portfolio approach reflects that shift.
We prefer growth exposure through equities and private infrastructure equity over high yield credit. Tighter spreads see us go underweight in high yield credit strategically, and reinforce our view that equities are better positioned if earnings strength persists.
We favor durable income in select private credit over taking more duration risk in government bonds and global IG credit.
Outro: Here’s our Market take
The same structural changes supporting stronger earnings are also pushing bond yields higher. We reflect that through our preference for equities, durable income and limiting duration risk.
Closing frame: Read details: blackrock.com/weekly-commentary
Strong corporate earnings and rising government bond yields tell the same story: a structurally higher cost of capital calls for a different portfolio approach.
US Treasury yields fell as weak jobs data eased pressure for an immediate Fed rate rise. But a steeper yield curve suggests long-term inflation risks remain.
July inflation data will show whether softer hiring and wages are feeding through to prices. We expect some inflation rebound from June’s softer reading.
Analysts are raising corporate earnings forecasts even as long-term government bond yields rise. These are not contradictory signals. We think both are consistent with the structural changes reshaping markets. That’s why our capital market assumptions (for professional investors only) are built around multiple scenarios with different macro outcomes. That framework underpins our preference for equities and underweight to developed market government bonds.
Breaking the cycle
S&P 500 earnings growth estimate paths, 2021-2027
Source: BlackRock Investment Institute with data from LSEG Datastream, August 7, 2026. Lines show the evolution of calendar year earnings estimates over time for the S&P 500 index.
Rapidly rising earnings forecasts and higher government bond yields might seem hard to reconcile. Both trends can pull markets in opposing directions, as higher long-term rates tend to dampen earnings growth. Yet five years after the last economic downturn, consensus earnings forecasts for 2026 are still being revised higher, not lower. See the chart. We see this as evidence of structural forces at play. In our CMAs, we see strong earnings growth as durable. We expect US corporate earnings to grow by 11.6% a year over the next five years — a pace seen in only about 15% of historical five-year periods. This outcome is not guaranteed and is conditional on AI adoption boosting productivity and profit margins. But the fact that it is plausible underscores why we cannot apply a typical business cycle playbook to long-term portfolios in this environment.
The same forces supporting corporate earnings are also driving the global bond reset that has lifted government bond yields since 2021. That aligns with our long-held view of a world shaped by supply scarcity, where investors demand more compensation for holding long-term government debt. Rising public borrowing, greater inflation uncertainty and more volatile bond markets have reinforced that trend. Yet we remain strategically underweight developed market government bonds. This is an active call because we think long-term yields have more room to run. Governments, AI hyperscalers and companies across the economy are competing ever more intensely for capital, keeping upward pressure on long-term government bond yields — even in our AI productivity boom scenario. We’ve argued that this environment calls for a different approach to portfolio construction as long-standing macro anchors investors have come to rely upon, such as stable inflation expectations, become less reliable. The industry’s growing focus on a total portfolio approach reflects that shift.
Shifting focus
For us, this means focusing more on the underlying drivers of risk and return across the portfolio and less on asset class labels. We remain underweight global investment-grade credit because today’s tight spreads offer little compensation for additional duration risk. Instead, we like selected private credit, including direct lending, where resilient cash flows, stronger lender protections and recovery value can provide durable income. Rising dispersion — the widening gap between stronger- and weaker-performing managers and borrowers — also reinforces the importance of manager selection.
We prefer growth exposure through equities and private infrastructure equity over high yield credit. Tighter spreads prompted our new strategic underweight in high yield this quarter and reinforce our view that equities are better positioned if earnings strength persists. We see valuations falling as earnings growth outpaces share price gains, allowing multiples to decline over time. We favor targeted exposures, such as in technology and healthcare, where structural shifts support earnings growth. We also see opportunities in infrastructure equity through investment in power, grids and data centers.
Our bottom line
The same structural changes supporting stronger earnings are also pushing bond yields higher. We reflect that through our preference for equities, durable income and limiting duration risk on a strategic horizon of five years or more.
This is our final edition before our summer publishing pause. The Weekly commentary will return on Monday, Aug. 31.
Market backdrop
The S&P 500 and Nasdaq notched their biggest weekly gains in three months on hopes of a Middle East peace deal and solid earnings. US Treasury yields fell after July payrolls unexpectedly declined. The gap between two- and 30-year yields has widened by roughly 20 basis points since the last Fed meeting. That leaves our investment view unchanged: the softer jobs report likely gives the Federal Reserve more flexibility but does not materially alter our longer-term inflation outlook.
July inflation will show whether softer hiring and wage growth are starting to feed through to prices. We think much of June’s inflation softness reflected normalisation in a handful of categories and is likely to reverse. The key watch is services inflation: sustained moderation there would strengthen the case for policy easing more than a single weak payroll reading.
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 August 6, 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 US dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE US Dollar Index (DXY), spot gold, spot bitcoin, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (US, Germany and Italy), Bloomberg Global High Yield Index, J.P. Morgan EMBI Index, Bloomberg Global Corporate Index and MSCI USA Index.
China total social financing
US CPI
US PPI; UK preliminary GDP
UK total trade balance, flash employment & flash GDP
Read our past weekly commentaries here.
Intersecting mega forces
Since we launched our mega forces framework it has become clearer how their intersection shapes almost all our investment views and opens up alpha opportunities. They cut across asset class labels, spurring a rethink of portfolio construction. Investors need to be deliberate about the economic or thematic exposures they own, the vehicles they use to implement them and their investment horizons.
From drivers to portfolio expressions
Our highest conviction views, August 2026
| Driver | What we think | Portfolio expression |
|---|---|---|
| Growth and AI scarcity | The AI buildout is speeding up, making bottlenecks binding. | Overweight US equities; focus on AI bottleneck opportunities: power, chips and data centers. |
| Duration and diversification | Long bonds carry high rate sensitivity and are less reliable diversifiers. | Prefer short- and medium-term government bonds over long bonds for income. |
| Credit spreads and liquidity | Selectivity is crucial amid tight spreads and uneven fundamentals. | Credit with clear cash flows, lender protections and recovery value; higher-rated high yield. |
| Inflation and scarcity | Scarcity, secure supply and power demand carry inflation risks. | Infrastructure, energy bottlenecks, EM local debt and real-asset-linked exposures. |
| Alpha opportunity | Macro outcomes matter again in the new regime. | Macro hedge funds, venture capital, market-neutral strategies, and selected private credit and non-US alpha. |
Note: Views are from a US dollar perspective, August 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.
Asset class implications
Six- to 12-month tactical positioning, August 2026
This shows the implementation of our key investment views from the previous page through an asset class lens.
| Asset | Tactical view | Commentary | ||||
|---|---|---|---|---|---|---|
| Equities | ||||||
| United States |  |
We are overweight. Strong corporate earnings, fueled by the AI buildout and a favorable macro backdrop, are outpacing higher interest rate expectations. | ||||
| Europe |  |
We are neutral. We would need to see more business-friendly policy and deeper capital markets for Europe to outperform. We favor financials, infrastructure, and industrials. | ||||
| UK | |
We are neutral. Valuations remain attractive relative to the US, but we see few near-term catalysts to trigger a shift. | ||||
| Japan | |
We are neutral. Strong corporate balance sheets and governance reforms remain supportive. We prefer targeted exposures to physical AI and the buildout’s bottlenecks. | ||||
| Emerging markets (EM) |  |
We are neutral. We see opportunities where the AI buildout drives demand for infrastructure, particularly in Latin America. | ||||
| China | |
We are neutral. We see opportunities in physical AI. Cheap, open-source AI could drive adoption, but that doesn’t necessarily translate into AI-provider profitability. | ||||
| Fixed income | ||||||
| Short US Treasuries | |
We are neutral. We prefer short- and medium-term Treasuries, given the attractive risk-adjusted income on offer. | ||||
| Long US Treasuries |  |
We are underweight. We see investors wanting more compensation for holding long-term bonds amid persistent inflation and high debt loads. Long-duration bonds also are a less reliable portfolio diversifier in the new regime. | ||||
| Global inflation-linked bonds | |
We are neutral. We see inflation settling above pre-pandemic levels, but markets may not price this in the near term as economic growth could slow. | ||||
| Euro area government bonds |  |
We are overweight short- and medium-term bonds. Markets are pricing restrictive policy rates of about 3% for several years. We think that’s overdone. | ||||
| UK Gilts | |
We are neutral. We expect periods of elevated volatility given political uncertainty, longer-term bonds making up a larger market share, and buyers becoming more price-sensitive. | ||||
| 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. A shift in investor sentiment toward equities limits upside. | ||||
| US 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. Spreads are tight due to corporate strength; they could widen if issuance increases or risk appetite shifts. | ||||
| 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 attractive income. We prefer higher-rated US and European high yield over investment grade and see dispersion of returns increasing. | ||||
| Asia credit | |
We are neutral. Overall yields are attractive and fundamentals are solid, but spreads are tight. | ||||
| Emerging hard currency | |
We are neutral. Fundamentals have improved, but we see a more attractive risk-reward profile in EM local debt. | ||||
| Emerging local currency | |
We are overweight. We like the yield relative to its volatility and improving fundamentals. | ||||
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, August 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.
| Asset | Tactical view | Commentary | ||
|---|---|---|---|---|
| Equities | ||||
| Europe ex UK | |
We are neutral. We would need to see more business-friendly policy and deeper capital markets for Europe to outperform and to justify a broad overweight. We stay selective, favoring financials, infrastructure, industrials, materials and healthcare. | ||
| Germany | |
We are neutral. Higher spending on defense and infrastructure support the corporate sector. Valuations are not stretched but neither compelling and expected earnings growth lags other countries. Light positioning means potential easing in geopolitical tensions and AI lifting industrials-driven earnings could create opportunities. | ||
| France | |
We are neutral. Strong expected earnings growth and global revenue exposure support French corporates. Valuations are less compelling, albeit not stretched versus euro area peers. Persistent political uncertainty leaves the overall risk reward balanced. | ||
| Italy | |
We are neutral. Earnings growth and momentum are strong, boosted by the significant exposure to financials, utilities and energy. Valuations are still at discount vs. peers, but not as much as in previous years. Political risk is currently low but likely to pick up ahead of 2027 elections. | ||
| Spain | |
We are overweight. Valuations remain attractive vs. peers even if relative earnings momentum has slowed. Strong domestic demand growth and exposure to fast-growing areas like Latin America support Spanish stocks. Financials, utilities and infrastructure-linked stocks would benefit from Europe’s push towards autonomy. | ||
| Netherlands | |
We are neutral. Earnings revisions in the IT sector, a large sector in the Dutch stock market is offset by other sectors seeing less favorable valuations and a weaker earnings outlook than European peers. | ||
| Switzerland |  |
We are neutral. Valuations have improved, from stretched levels, but the earnings outlook is weaker than other European markets. If global risk appetite stays strong, the index’s tilt to stable, less volatile sectors may weigh on performance. | ||
| UK | |
We are neutral. Valuations remain attractive relative to the US, but we see few near-term catalysts to trigger a shift. | ||
| Fixed income | ||||
| Euro area government bonds | |
We are overweight short- and medium-term bonds. Markets are pricing restrictive policy rates of about 3% for several years. We think that’s overdone. | ||
| German bunds | |
We are overweight shorter-term Bunds as the market-implied ECB policy path appears too hawkish. We stay neutral long-dated Bunds. Fiscal stimulus and increased bond issuance exert upward pressure on yields, alongside inflation risks amid lingering geopolitical tensions. | ||
| French OATs | |
We are neutral. Elevated political uncertainty, high budget deficits and slow structural reforms could stoke volatility, but these risks already seem priced into OATs and we don’t expect a material worsening from here. | ||
| Italian BTPs | |
We are neutral. The spread over German bunds looks tight given Italy’s large budget deficits and growing public debt. Domestic factors remain supportive, with growth holding up relative to the rest of the euro area and local demand for BTPs solid at current yield levels. Domestic disapproval would likely prevent defense spending from reaching fiscally unstable levels. Political uncertainty is likely to increase ahead of next year’s elections. | ||
| UK gilts | |
We are neutral. We expect periods of elevated volatility given political uncertainty, longer-term bonds making up a larger market share, and buyers becoming more price-sensitive. | ||
| Swiss government bonds | |
We are neutral. The SNB seems comfortable with its medium-term inflation outlook and its current policy stance. Market pricing is broadly in line with SNB messaging. | ||
| European inflation-protected securities | |
We are neutral. We see higher medium-term inflation, but inflation expectations are firmly anchored. Cooling inflation and uncertain growth may matter more near term. | ||
| European investment grade | |
European investment grade is supported by healthy corporate sector balance sheets, contained default rates and the persistently strong demand for durable income from European households. We prefer European investment grade over the US. | ||
| European high yield | |
We are overweight. While spreads are low, the income potential remains attractive. Defaults are contained and high yield is of higher quality and less sensitive to interest rate swings compared with the US. | ||
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, August 2026. 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
Wei Li
Vivek Paul
Devan Nathwani
Vidy Vairavamurthy
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