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Q4 2025

Equity Market Outlook

Can stocks maintain their drive through the year’s final quarter? AI tailwinds appear to have staying power, even in unexpected places, according to our alpha-seeking equity investors. Their Q4 outlook explores momentum’s new look, the benefit of being rational amid irrational exuberance, and mega force-driven opportunities in Europe and Asia.
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At a glance

1

Navigating market change

Factors matter to return objectives, but their makeup is being disrupted in the current environment. A dynamic approach is needed to navigate the rotations.
2

A time for rational exuberance

Irrational exuberance can lead to market mispricings, a potential boon for fundamental-based stock pickers. And we see three sectors ripe for picking.
3

The hunt for hidden alpha

AI has been driving returns year-to-date, even in some surprising places. Two underappreciated beneficiaries: clean energy and Spain.
4

Asia’s role in making history

Mega forces are reshaping economies and markets, and Asia is home to companies poised to contribute to the transformation in three key areas.

Taking stock

Artificial intelligence (AI) has been a source of stock market excitement since ChatGPT burst onto the scene in November 2022 and revealed the previously inconceivable capabilities of generative AI.

 

It is no surprise then that each of this quarter’s commentaries carries a familiar refrAIn, from how AI is upending traditional expectations for factors such as momentum, quality and value, to revealing underappreciated AI opportunities in clean energy and in places like Spain and parts of Asia.

 

Our active investors know that the AI opportunity is not static but continuously evolving alongside the technology itself, making this an extraordinary time to be an alpha seeker.

Tony DeSpirito

Tony DeSpirito

Global CIO, BlackRock Fundamental Equities
Raffaele Savi

Raffaele Savi

Co-CIO and Co-Head of BlackRock Systematic Equities

We enter the last quarter of the year with an outlook for the AI engine to continue fueling markets, but with a potential broadening of the opportunity set within and beyond AI.

Momentum’s new look: Navigating market change

The momentum factor’s headline performance has mirrored the strength of equity markets, sustaining an extended run alongside themes such as the surge of AI innovation and adoption. Unlike other style factors, momentum is inherently adaptive, evolving to capture prevailing performance trends. But that adaptability can leave investors uneasy, as long stretches of outperformance often raise concerns about crowding and stretched valuations.

 

Jeff Shen, Co-Head and Co-CIO of Systematic Equities, and Philip Hodges, Co-Lead of the team’s Macro Group, see an evolution in the factor’s composition that allows it to capture a broader phase of the AI trade, making the case for continued momentum strength.

A time for rational exuberance in U.S. equities

Is “irrational exuberance” sending U.S. stock prices to levels inconsistent with their underlying fundamentals? Fundamental Equities Global CIO Tony DeSpirito says “perhaps in spots,” but he and colleague Carrie King, U.S. and Developed Markets CIO, believe this sets up a favorable backdrop for stock selection.

 

They suggest now is a time for “rational exuberance” ― a moment to lean into the virtues of bottom-up stock analysis and selection to avoid the pitfalls of psychological contagion and crowded positioning that typically arise amid pockets of speculative behavior ― and often lead to mispricings. They see three areas particularly ripe for stock picking: technology, healthcare and financials.

The hunt for hidden alpha

Massive capex spending by U.S. tech giants to support the AI buildout is having implications for equity investors beyond the tech sector ― and well beyond the U.S.

 

Helen Jewell, BlackRock Fundamental Equities’ EMEA CIO, looks at two surprising winners of 2025, and their potential to continue their ascent. These two seemingly unrelated parts of the market have one thing in common: a link to the big AI spending. The first is clean energy, as the vast power demands to run AI data centers will require all forms of energy. The second is Spain, where earnings growth has been partially driven by investments in the electricity grid to support the nation’s emergence as a European data-center hub.

Asia’s current role in making history

Economies and financial markets are being transformed today by powerful mega forces, including digital disruption and AI, the energy transition, and geopolitical fragmentation that is rewiring supply chains.

 

The significance of this will be clearer in five years when hindsight makes it easier to connect the dots. But Belinda Boa, BlackRock Fundamental Equities’ Emerging Markets CIO, says investors need not wait that long to capitalize on the opportunities, and sees the Asia-Pacific region contributing to and reaping benefits from the transformation. She identifies three main areas of interest for both local and global investors: AI and robotics; metals and mining; and advanced manufacturing.

Practitioner’s perspective

Michael Gates, lead portfolio manager of BlackRock’s Target Allocation Models, has leaned heavily on the strength of earnings and their revisions this year, an important and timely position as U.S. equities appear well on track to deliver above-average annual returns once again.

 

At the index level, the S&P 500 posted a 13.7% price return through the first three quarters ― 8.8% from earnings growth (a solid number) and 4.9% from multiple expansion. Slicing the data tells a more striking story. The S&P 500 tech sector gained 21.75%, driven by 17% earnings growth and just 4.8% multiple expansion ― less than the index overall. In contrast, the ex-tech S&P 500 rose 9.9%, with less than half of that (4.6%) coming from earnings and the remaining 5.3% fueled by multiple expansion. (Returns cited are from Bloomberg.)

 

These numbers underscore a familiar lesson: Earnings growth remains the key driver of market performance, especially within tech. Multiple expansion has contributed, but has been the bigger factor outside the sector. The strongest returns have consistently accrued to companies delivering the best fundamentals.

 

In a market rife with narratives and noise, the scoreboard doesn’t lie: What’s working is what’s growing ― and that’s where Mr. Gates’ conviction remains strongest.

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Key client questions this quarter

  • We have an outlook for continued strength in the momentum factor, thanks to an inherent adaptability that allows it to evolve to capture prevailing performance trends. Two years ago, momentum was heavily concentrated in AI enablers. It then diversified into financials as falling front-end rates and a steeper yield curve improved prospects for banks and lenders. Today, momentum has expanded to capture a broader phase of the AI trade, including adopters across industries.

    These kinds of shifts reinforce that markets today are anything but static. Leadership is constantly rotating beneath the surface, requiring a dynamic approach to portfolio management.

  • Not entirely, but in spots. We see some signs of speculative behavior today. Our review of factor returns year-to-date finds that unprofitable companies have outperformed the broader market while low-volatility and dividend-paying baskets have lagged. We’ve also seen a pick-up in “meme stock” investing among retail investors guided by social media trends.

    But this environment can set up a favorable backdrop for stock selection in that it creates mispricings, which can be an active investor’s best friend. We believe today is a time for “rational exuberance” ― a moment to lean into the virtues of bottom-up stock analysis and selection to avoid the pitfalls of psychological contagion and crowded positioning that typically arise amid pockets of irrational exuberance. Three areas we find particularly ripe for stock picking: technology, healthcare and financials.

  • Much of the market narrative in 2025 has been focused on the U.S., especially the tech sector ― and for good reason. The primary focus has been on AI beneficiaries as large U.S. tech companies announced intentions to spend nearly half a trillion dollars on AI capex this year. Yet this spending has implications for equity investors well beyond the tech sector, and beyond the U.S.

    Equity market performance year-to-date reveals two surprising winners of 2025, both with links to the vast AI spending. The first is clean energy, which will play a part in powering AI data centers. The second is Spain, which is setting up to be a European data-center hub. We see more upside in both of these areas and opportunity for skilled stock pickers to source potential winners.

  • Absolutely. As mega forces reshape economies and financial markets, we see the Asia-Pacific region contributing to this history-making transformation, reaping benefits from it, and offering tangible opportunities for local and global equity investors. Three areas of interest are:

    1. AI and robotics, where Asia has global leaders in components (Taiwan), dRAM (Korea), internet applications and robotics (Mainland China), and leading-edge technologies to address demographic challenges (Japan). 2. Metals and mining, which is experiencing a resurgence on the transition to green energy and need for materials, such as copper, to support it. Select countries in Asia are well positioned with cost-effective supply chains. 3. Advanced manufacturing, where Asia has key roles to play in the buildout of data centers and transportation systems, to name just two.

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