Carolyn Barnette
As we begin a new year, it’s a natural time to revisit portfolio positioning — where to double down, where to shore up underweights, and where it may make sense to rebalance positions that have run beyond targets.
After all, looking back at 2025, most assets finished the year higher. International stocks and bonds outperformed their U.S. counterparts in a big way. In fact, the MSCI EAFE Index beat the S&P 500 by the widest margin since 1993.
And one big laggard was cash. Despite record inflows, cash returned just over 3%, underperforming stocks and bonds. By comparison, the Agg Bond Index returned about 7%, and the S&P 500 finished the year up 18%.
As we look ahead, we believe a resilient economy and supportive macro data could further reduce the relative attractiveness of cash. As a result, we continue to prefer stocks over bonds, and bonds over cash.
Faye Witherall
At a high level, the macro backdrop looks constructive. Growth surprised to the upside last year, interest rates ended 2025 lower, and fiscal stimulus alongside AI-driven productivity gains could continue to support momentum. Labor markets weakened enough to allow the Fed to cut rates, but not enough to derail consumer spending. The Fed has indicated the potential for modest rate cuts in 2026, with scope for additional easing.
Now, within U.S. equities, much of the attention has been on technology. While strong returns raised bubble concerns, valuations actually became more attractive as earnings growth from AI-related companies significantly outpaced the broader market. Consider, the tech sector started the year trading at a 37.6x forward P/E and ended the year at 36.2x. We maintain our conviction in U.S. tech and AI-linked opportunities.
Carolyn Barnette
Given the strong performance of international equities last year, we’re also getting more questions about the outlook — particularly from advisors who have been structurally underweight.
We see the most compelling opportunities in emerging markets. After all, many EM countries have their own AI leaders, which could continue to drive their stock markets higher.
But our outlook for developed markets outside the U.S. is less rosy. Last year, about a third of their performance came from a weaker dollar. The MSCI EAFE returned 21% in local currency terms, but more than 30% in dollar terms. We don’t expect the same currency tailwind this year, and more limited exposure to AI could weigh on returns. But while we’re less constructive on Europe in our base case, we still see diversification value — particularly as a hedge against a potential pullback in U.S. AI-driven equities.
And speaking of diversification, bonds returned to their traditional role in 2025, providing positive returns when investors needed them most. Currency moves supported international bonds, driving much of the outperformance versus U.S. bonds and lifting returns in emerging market debt.
Looking forward, we expect income to drive the majority of bond returns across asset classes, absent an economic shock. To balance risk and return, we favor the belly of the Treasury curve for diversification, along with select credit sectors and emerging market bonds.
Turning to private markets, deal activity picked up meaningfully in 2025. Lower interest rates help unlock exits, which can be positive for private equity returns. And we also see additional opportunity here as private companies play an important role in funding AI infrastructure. That said, manager selection remains critical — performance dispersion in private equity has been significantly wider than in public markets.
In private credit, defaults remained low overall, but dispersion across company sizes was notable. Larger borrowers continued to show resilience, while smaller companies faced more pressure.
We continue to favor the higher yields available in private credit, with an emphasis on careful credit selection.
Faye Witherall
So pulling it all together:
We remain constructive on equities in 2026, and have a preference for AI-related opportunities in the U.S. and in Emerging Markets
We see opportunity generate income beyond cash, favoring core bonds for ballast and flexible strategies for income
And we believe options and alternatives can help improve portfolio outcomes by providing uncorrelated returns, enhanced income, or buffered exposure.
So check out the full Advisor Outlook for more of our best thinking, and I encourage you to reach out to your local market team or call 877-ASK-1BLK to dive more deeply into our outlook for 2026.
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