Jean Boivin – Head of BlackRock Investment Institute together with Wei Li – Global Chief Investment Strategist, Vivek Paul – Global Head of Portfolio Research and Roelof Salomons – Chief Investment Strategist for the Netherlands 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
Upgrading European stocks: We still think U.S. equities can outperform in 2025, led by tech, even as Europe’s start the year strong. Yet we broaden our risk-on view, upgrading Europe stocks.
Market backdrop: U.S. stocks tumbled last week – now up about 3% for the year, versus nearly 9% in Europe. We see markets reflecting tariff concerns and an evolving AI story.
Week ahead: This week, we get U.S. PCE for January. Any pickup in inflation would provide more evidence that December’s CPI moderation was an outlier, in our view.
European equity gains have outpaced the U.S. to start 2025. We had said Europe’s stocks needed a catalyst to turn around poor sentiment. We now see several that – if they materialize – could boost cheap valuations, so we close our underweight on Europe’s stocks. Yet we still expect the U.S. to reclaim leadership this year and stay overweight U.S. stocks as corporate earnings strength and the artificial intelligence (AI) theme broaden out. We turn more underweight long-term U.S. Treasuries.
U.S. equities have long outperformed their global peers. Some pin that on tech’s greater share in its market, bigger fiscal spend in recent years and energy independence, but we would attribute it more to deeper capital markets and relative deregulation that promote risk-taking. We think the U.S. can keep its edge, even if the S&P 500 has lagged so far this year. Yet we believe Europe can close some of the return gap. With a lot of bad news priced into European equities, even prospects of good news could help them push higher. One example: Possible de-escalation in the Ukraine war. Reduced reliance on Russian gas brought European energy prices down from 2022’s highs. See the chart. A form of peace agreement could lower energy prices further, boosting European growth and lowering inflation. This is just one of several catalysts we think could broaden U.S. equity strength to Europe.
We eye other catalysts for European equities as well. We expect more defense spending as the U.S. has stated Europe is no longer a primary security priority. The EU now has an air of urgency that typically spurs action. In Germany, the weekend’s election result could herald fiscal loosening – though it’s a long and uncertain road there. Still sluggish euro area growth and easing inflation gives the European Central Bank room to cut rates more this year, we think. So, we go neutral Europe’s stocks and still favor European financials – a preference that also served us well last year. Yet Europe still faces multiple structural issues, from lagging competitiveness to potential U.S. tariffs – justifying some of Europe’s hefty valuation discount, we think.
Positive on the U.S.
Our assessment of the U.S. is unchanged: we expect mega-cap tech and other AI-linked stocks to keep driving U.S. equity returns, especially as AI adoption grows. But we also see signs of earnings strength broadening beyond tech. Analysts now expect tech to deliver 18% earnings growth this year versus 11% for the broader index, LSEG data show – a smaller gap vs. 2024. We think risk assets could also weather the higher growth and higher inflation mix we see as increasingly possible. New tariffs and U.S. policy shifts aimed at boosting growth, like deregulation, carry inflationary potential. Markets have embraced our higher-for-longer rate view, yet we still see term premium rising more than currently priced as investors demand more return for the risk of holding long-term bonds – even if the administration’s focus on long-term yields and talks of pausing quantitative tightening could delay some of the rise for now. We go further underweight long-term U.S. Treasuries as a result.
In China, apparent efficiency gains by AI startup DeepSeek have driven a surge in China’s tech sector. President Xi Jinping’s recent meeting with private sector business leaders could signal a more supportive regulatory backdrop, yet the broader environment of U.S.-China technology competition may present challenges. We evolve our tactical overweight to Chinese equities as tech excitement could keep driving returns, potentially reducing the odds of much-anticipated government stimulus. Over the longer term, we are more wary given structural challenges to China’s growth and tariff risks.
Our bottom line
We stay overweight U.S. equities, even with their softer start to 2025. Yet we think their lead over global peers could narrow this year. We upgrade European stocks to neutral while going further underweight long-dated U.S. Treasuries.
Market backdrop
The S&P 500 slid nearly 2% last week. The index is up 2.5% this year, but still lagging Europe’s Stoxx 600, which is up 8.5% year to date. Ten-year U.S. Treasury yields ticked down to 4.43%, about 40 basis points below 2025’s high. Hong Kong-listed Chinese stocks shook off a steep fall to rise 4% last week, up 22% in 2025. We think such moves reflect improving sentiment in Europe, concerns about potential U.S. policy changes and disappointing economic data, and the evolving AI theme.
This week, we get U.S. PCE for January. The latest U.S. CPI print came in hotter than expected, indicating that elevated wage pressures are still driving sticky inflation. We watch for whether PCE follows suit, which would point to December’s CPI moderation being an outlier. In Japan CPI data out this week, we expect a pickup due to rising food prices.
UK CPI is the main macro event on tap this week. Markets will be looking for signs of progress in the Bank of England’s (BOE’s) fight against inflation following last week’s 25-basis point policy rate cut. Even as UK inflation remains above the BOE’s 2% target, we think the UK’s weak growth outlook gives the BOE further room to cut policy rates this year. Japan trade data will also be in focus given the Trump administration’s plans to implement reciprocal tariffs, including on Japan.
Week Ahead
Feb. 25: U.S. consumer confidence; Japan service PPI
Feb. 27: U.S. durable goods
Feb. 28: U.S. PCE; Japan CPI
March 1: China manufacturing PMI
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