Jean Boivin Head of BlackRock Investment Institute together with Wei Li – Global Chief Investment Strategist, Vivek Paul – Global Head of Portfolio Research, and Ben Powell – Chief Investment Strategist for the Middle East and APAC all forming part of the BlackRock Investment Institute share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.
Key Points
Transformation underway: Structural shifts, like artificial intelligence, are reshaping economies. We stay pro-risk and up our U.S. stocks overweight as we see beneficiaries broadening.
Market backdrop: U.S. stocks hit new highs last week. November’s U.S. jobs report showed wage growth above the level that would allow inflation to settle at the Fed’s target.
Week ahead: We see the European Central Bank cutting rates by 25 basis points this week. U.S. CPI should show services inflation staying sticky on solid wage gains.
This year has reinforced that we are not in a typical business cycle. Instead, mega forces – big structural shifts like the rise of artificial intelligence (AI) – are transforming economies and altering their long-term trajectories. That calls for a new way of investing: being more dynamic and putting more focus on themes and less on broad asset classes. We stay risk-on in our 2025 Outlook and up our U.S. equity overweight as the AI theme broadens out – but stand ready to dial down risk.
We think investors should no longer think in terms of business cycles, with short-term fluctuations in activity leading to expansion or recession. Instead, mega forces are driving an economic transformation that could keep shifting the long-term trend, making a wide range of very different outcomes possible – on the upside and downside. Building the transformation – such as with AI data centers – requires a major infrastructure buildout. Financing the transformation given constrained public finances means that capital markets, including private markets, will be key. Markets are starting to reflect these shifts: The “magnificent 7” of mostly mega-cap tech shares now make up almost a third of the S&P 500’s market capitalization. See the chart. We think this calls for rethinking investing, and challenges investment strategies based on valuations converging back to historical trends.
We follow that playbook as we stay pro-risk headed into 2025. We increase our overweight to U.S. stocks as we expect AI beneficiaries to broaden out beyond tech. We’re also confident U.S. equities can keep outpacing global peers given the ability to better capitalize on mega forces, a favorable growth outlook, potential tax cuts and regulatory easing. Signposts for changing our view include any surge in long-term bond yields or an escalation in trade protectionism. Pricey U.S. equity valuations, based on price-to-earnings ratios and equity risk premiums, don’t yet change our view. Why? We find valuations affect near-term returns less than long-term returns. The equity risk premium – a common valuation gauge – for the equal-weighted S&P 500 is near its long-term average, according to LSEG data, and thus looks less affected by the transformation.
Harnessing the transformation
U.S. outperformance is unlikely to extend to government bonds. We go tactically underweight long-term Treasuries as we expect investors to demand more compensation for the risk of holding them given persistent budget deficits, sticky inflation and greater bond market volatility. We favor government bonds in other developed markets. Globally, Japanese equities stand out due to corporate reforms and the return of mild inflation that are driving corporate pricing power and earnings growth.
More broadly, we think investors can find opportunities by tapping into the transformation we expect in the real economy. AI and the low-carbon transition require investment potentially on par with the Industrial Revolution. Major tech companies are starting to rival the U.S. government on research and development spending. Plus, meeting growing energy demand will generate US$3.5 trillion of investment per year this decade, according to the BlackRock Investment Institute Transition Scenario. We see private markets playing a vital role in financing the future. Big spending on AI and the low-carbon transition plus rising geopolitical fragmentation is likely to cause persistent U.S. inflation pressures. And an aging workforce could start to bite as immigration slows, likely keeping wage growth too high for inflation to return to the Fed’s 2% target. We think that means the Fed will keep rates well above pre-pandemic levels even after cutting some in 2025.
Our bottom line
Mega forces are reshaping economies and markets. That requires a new playbook challenging old investment rules. We stay pro-risk to kick off 2025 but stand ready to dial down risk as catalysts emerge. Read our 2025 Global Outlook.
Market backdrop
U.S. stocks hit an all-time high last week. U.S. payrolls for November showed the economy is adding jobs at a healthy clip. Wage growth remains above the level that would allow inflation to settle at the Fed’s 2% target – a reason we do not see the Fed cutting rates sharply. U.S. 10-year Treasury yields slid to around 4.15%, down about 35 basis points in the past few weeks. Spreads between French and German 10-year yields edged off 12-year highs reached on France’s political stalemate.
This week we expect the ECB to cut interest rates by 25 basis points as euro area core inflation has kept normalizing. We’re monitoring the ECB’s updated growth and inflation projections as consumer spending shows signs of recovery. Yet fiscal consolidation and the potential impact of U.S. tariffs cloud the outlook. In the U.S., we watch for whether the November CPI will keep showing services inflation catching up with wage growth, keeping core inflation sticky.
Week Ahead
Dec. 9: China CPI and PPI
Dec. 10: China trade data
Dec. 11: U.S. CPI
Dec. 12: European Central Bank (ECB) policy decision
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