Hard economic rules can bind quickly
Market take
Weekly video_20250428
Michel Dilmanian
Portfolio Strategist, BlackRock Investment Institute
Opening frame: What’s driving markets? Market take
Camera frame
We’ve flagged how economic rules could bind policy. This played out quickly last week with the US softening its trade stance on China.
Title slide: Hard economic rules can bind quickly
1: Economic rules in play
Decoupling from China, bringing production closer to the US, and supply chain diversification are top US strategic priorities. Yet such goals must confront a core economic rule: Global supply chains can’t be rewired quickly without major disruption.
Tariffs can raise costs, cut access to key inputs and potentially halt production. China is a key supplier of critical minerals, semiconductors, industrial parts, specialty chemicals and auto components.
2: Sectoral vulnerabilities
The binding effect of economic rules on trade policy means it will take time to rewire trade relationships and see the damage from tariffs.
So far, analysts have sharply cut estimates for 2025 earnings growth for the consumer discretionary and industrials sectors due to their reliance on foreign revenues and global supply chains.
3: What we’re eyeing
We look for signs of pressure in corporate commentary on supply chain disruptions, changes in the ability to pass costs to consumers and shifts in consumer demand.
For the 'magnificent seven' big tech companies, we’re eyeing changes to AI capital spending plans.
Outro: Here’s our Market take
Economic rules can bind policy quickly. That’s why we see policy uncertainty easing over the next six to 12 months, keeping us overweight developed market stocks.
Closing frame: Read details: blackrock.com/weekly-commentary
We’ve said economic rules could bind US policy changes. Last week’s trade policy updates show how quickly these rules can bind when facing disruption.
US stocks rebounded last week and are now down less than 3% since the April 2 tariff news. US 10-year yields fell but are still up sharply from their April lows.
This week, we eye April US jobs data for early signs of how recent US tariff announcements are affecting business confidence and hiring decisions.
We laid out two economic rules binding on attempts at abrupt US policy changes: financing debt and supply chains. Supply chains can’t be rewired quickly without major disruption. Signs last week of the US softening its trade stance on China show the second starting to bind as negotiations take shape. That’s why we see US policy settling down on our tactical six- to 12-month horizon. We stay positive on developed market (DM) stocks yet see more near-term volatility.
Deeply intertwined
China share of US imports and their share of US production, 2024
Source: BlackRock Investment Institute, US Census Bureau, April 2025. Note: The chart shows the value of China’s imports relative to US production (horizontal axis) vs. the share of China in total imports for that sector (vertical axis). Highlighted sectors are those with either outlying value or share of trade, or both. The dot for “Manufacturing” is the average of all US manufacturing sectors.
US stocks rose 14% from their April lows last week as the US showed signs it may soften its trade stance on China – more evidence economic rules can limit what’s possible in trade negotiations, we think. We track these rules instead of trying to predict policy shifts. Decoupling from China, bringing production to the US, and supply chain diversification are US strategic priorities. Yet global supply chains can’t be rewired quickly without major disruption – an economic rule. China is a key supplier of critical minerals, semiconductors, industrial parts and auto parts, US Census data show. How intertwined are the economies? US imports of computer and electronics are bigger than total US production of these items. See the chart. Tariffs could up costs, cut access to key inputs and halt production. A cooling US stance would point to growing awareness of the risks tied to a supply shock.
Big questions remain about the damage tariffs could cause, even if the binding effect of economic rules means it will take time to uproot current trade relationships. We see more cause for concern on the supply side, as disruptions could lower productivity and the growth trajectory – like the pandemic shock. Long-term capital spending could also be hurt by uncertainty as happened after the 2016 Brexit vote. To gauge how long the damage could last, we’re monitoring indicators like capital spending plans, consumer confidence, high-frequency data on port traffic and early reads on trade flows.
What we're eyeing
We look for signs of pressure on companies in earnings reports: think mentions of changes in supply chains, the ability to pass costs to consumers and consumer demand. For the “magnificent seven” of mostly big tech companies, we’re eyeing any changes in their plans for artificial intelligence (AI) capital spending given more efficient AI models and exposure to the trade war. In consumer goods, we are tracking guidance on any impacts from weakening consumer sentiment and potentially higher prices. Analysts have cut forecasts for 2025 S&P 500 earnings growth to about 9% from 14% in January, LSEG data show. Prolonged uncertainty could spur further cuts. The consumer discretionary and industrials sectors have suffered sharp declines for 2025 forecasts given their reliance on foreign revenues and global supply chains.
How to invest amid policy uncertainty? We think this calls for more dynamic portfolios. Economic rules help gauge where trade negotiations could settle, so we see uncertainty easing over six to 12 months. We stay positive on DM stocks but expect ongoing, near-term volatility. Our expectation for clarity and support from mega forces is why we favor some alterative assets on a strategic horizon of five years and longer. Policy uncertainty has caused dealmaking to slow as investors struggle to value assets near term. We see dealmaking resuming as clarity returns. Yet private markets are complex and aren’t suitable for all investors. We also like publicly listed real estate and infrastructure as they’ve diversified portfolios, outperforming US large cap stocks since their February peak, Bloomberg data show. Plus, they stand to benefit from a host of mega forces.
Our bottom line
Economic rules can put bounds on the maximal stance in trade negotiations. We stay positive on DM stocks but expect ongoing, near-term volatility. We also favor publicly listed alternative assets as portfolio diversifiers.
Market backdrop
US stocks jumped more than 4% last week and are now up 14% from a 14-month low hit earlier in the month, driven by tech. Yet uncertainty over tariffs has prompted more companies to withdraw or soften earnings guidance. Europe’s Stoxx 600 rose nearly 3% last week and is up roughly 10% from its April low. US 10-year yields fell to near 4.25% but are still up about 40 basis points from their April low. The US dollar inched up from three-year lows against major currencies.
We are closely monitoring the US payrolls report out this week. The report could show early signs of changes in business confidence and hiring decisions even as the US has paused tariffs announced on April 2 for most countries for 90 days. Recently strong jobs data had shown still elevated wage pressures. The pace of job gains was also not consistent with core inflation falling back near the Federal Reserve’s 2% target – even before factoring in the inflationary impact of tariffs.
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 April 24, 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 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.
US PCE
Bank of Japan policy decision
Euro area flash inflation data; US payrolls
Read our past weekly commentaries here.
Big calls
Our highest conviction views on six- to 12-month (tactical) and over five-year (strategic) horizons, April 2025
| Reasons | ||
|---|---|---|
| Tactical | ||
| US equities | Policy uncertainty may weigh on growth and stocks in the near term. Yet we think US equities can regain their global leadership. We think the underlying economy and corporate earnings are still solid and supported by mega forces such as AI. | |
| Japanese equities | We 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 | Persistent deficits and sticky inflation in the US make us underweight long-term US Treasuries. We also prefer European credit – both investment grade and high yield – over the US on more attractive spreads. | |
| 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 DM government bonds over investment grade credit given tight spreads. Within DM government bonds, we favor short- and medium-term maturities in the US, and UK gilts across maturities. | |
| 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 the outlook. | |
Note: Views are from a US dollar perspective, April 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.
Tactical granular views
Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, April 2025
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 | ||||||
| United States |  |
We are overweight. Policy uncertainty may weigh on growth and stocks in the near term. Yet we think the underlying economy and corporate earnings are still solid and supported by mega forces such as AI. | ||||
| Europe |  |
We are neutral, preferring the US and Japan. We see room for more European Central Bank rate cuts, supporting an earnings recovery. Rising defense spending, as well as potential fiscal loosening and de-escalation in the Ukraine war are other positives. | ||||
| 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 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. | ||||
| Emerging markets | |
We are neutral. US tariffs and trade tensions are likely to drag on growth in China and emerging markets more broadly, even with potential policy support. | ||||
| China | |
We are neutral. The uncertainty of trade barriers makes us more cautious, with potential policy stimulus only partly offsetting the drag. We still see structural challenges to China’s growth. | ||||
| Fixed income | ||||||
| Short US Treasuries | |
We are overweight. We view short-term Treasuries as akin to cash in our tactical views – but we would still lean against the market pricing of multiple Fed rate cuts this year. | ||||
| 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 underweight. We see room for yields to climb more as Europe moves to ramp up defense and infrastructure spending. The European Central Bank is also nearing the end of rate cuts. | ||||
| UK Gilts | |
We are neutral. Gilt yields are off their highs, but the risk of higher US yields having a knock-on impact and reducing the UK’s fiscal space has risen. We are monitoring the UK fiscal situation. | ||||
| Japan government bonds | |
We are underweight. Yields have surged, yet stock returns still look more attractive to us. | ||||
| 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 underweight. We see emerging market currencies as especially sensitive to trade uncertainty and global risk sentiment. | ||||
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, April 2025
| Asset | Tactical view | Commentary | ||
|---|---|---|---|---|
| Equities | ||||
| Europe ex UK | |
We are neutral, preferring the US and Japan. We see room for more European Central Bank rate cuts, supporting an earnings recovery. Rising defense spending, as well as potential fiscal loosening and de-escalation in the Ukraine war are other positives. | ||
| 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 underweight. We see room for yields to climb more as Europe moves to ramp up defense and infrastructure spending. The European Central Bank is also nearing the end of rate cuts. | ||
| 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 neutral. Gilt yields are off their highs, but the risk of higher US yields having a knock-on impact and reducing the UK’s fiscal space has risen. We are monitoring the UK fiscal situation. | ||
| 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, April 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.
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