Jean Boivin – Head of BlackRock Investment Institute together with Wei Li – Global Chief Investment Strategist, Helen Jewell – Chief Investment Officer EMEA, Fundamental Equities and Carolina Martinez
Arevalo – Portfolio Strategist 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
Sticking with U.S. stocks: We stay overweight U.S. stocks for now, and corporate earnings strength is likely to broaden to sectors beyond tech. Yet we watch for triggers to change our view.
Market backdrop: A strong start to Q4 earnings season sent U.S. stocks to record highs last week, led by the tech sector. U.S. 10-year Treasury yields were mostly steady.
Week ahead: Central bank meetings take center stage this week, with the Federal Reserve likely to hold rates steady. Markets have warmed to our higher-for-longer view.
Corporate earnings beats have set the tone for the Q4 season in swing. Even with higher-for-longer interest rates, we think U.S. stocks can keep outperforming this year. We stay overweight. Resilient economic growth is helping sectors beyond tech. That’s partly driven by artificial intelligence (AI) spurring earnings beyond the initial winners during an economic transformation and policy change, we think. Yet we eye risks to risk appetite changing this year depending on earnings and policy.
The surge in long-term bond yields highlighted how markets have embraced our view that interest rates will stay above pre-pandemic levels. Even as markets have priced out some rate cuts, strong corporate earnings growth has pushed U.S. stocks higher. The ”magnificent seven” of mostly mega cap tech companies have driven earnings growth in recent years. Yet policy shifts, a low earnings base for the rest of the market and more non-tech contributors to the AI buildout over time could spur strength to broaden. Analyst forecasts reflect that: The gap between magnificent 7 earnings and those for the rest of the market is expected to shrink in 2025. See the chart. Yet our U.S. equity overweight is not contingent on broadening. We see concentration in mega cap tech as a feature of the economic transformation driven by mega forces like AI – a reason we still like the magnificent seven.
Companies are beating expectations so far, with overall S&P 500 earnings expected to grow roughly 11% for Q4 2024, LSEG Datastream data show. Analysts see earnings jumping 14% this year. That number may tick down as typically happens in most years as early optimism fades, but all sectors – even the struggling energy, materials and healthcare sectors – are expected to see growth. That’s powered by resilient economic growth as consumer spending has held up.
Evolving our views
Looking ahead, we’re tracking how U.S. policy could affect different sectors and potentially cause earnings strength to broaden further. The financial sector could get a boost from expected deregulation if it spurs more corporate dealmaking. President Donald Trump’s executive orders also aim to ramp up energy production, including making it easier to gain permits for building energy infrastructure. Policy changes could bolster sticky inflation, reinforcing our view of higher-for-longer rates and potentially driving the dollar toward its 2022 peaks. That would put pressure on profit margins for big U.S. exporters.
Even as earnings strength broadens, we still favor the AI theme. A pledge by big tech companies to spend billions of dollars building data centers highlights the ongoing buildout. We think big tech can keep delivering on earnings, but misses could revive concerns that big capital spending on AI won’t pay off – one of three triggers to dial down our pro-risk view. Metrics like capex-to-sales ratios and free cash flows suggest that, for now, mega cap tech firms are not overextended. Overinvestment should be assessed in aggregate, in our view, given AI’s potential to unlock new revenue streams across the economy.
Earnings are broadening in Europe, but more slowly. They’re forecast to grow 2% in Q4 and 8% for 2025. We still prefer U.S. stocks over Europe’s. Political strains in the region, potential U.S. tariffs and a weak Chinese economy remain risks. Yet weak investor sentiment sets a low bar for positive surprises to lift the market. We like quality companies with strong free cash flow and global operations better shielded from tariffs. Industrial and semiconductor companies benefit from structural shifts.
Our bottom line
Earnings growth has helped U.S. stocks climb even with higher interest rates. We think U.S. stocks can keep outperforming as earnings strength broadens beyond tech. We stay overweight U.S. stocks in our six- to 12-month views.
Market backdrop
A strong start to Q4 earnings season pushed U.S. stocks to new record highs last week, with tech stocks leading and taking the S&P 500 up nearly 4% for the year. U.S. 10-year Treasury yields were mostly steady around 4.60% before this week’s Federal Reserve policy meeting. The Japanese yen was also broadly steady after the Bank of Japan raised its policy rate to a 17-year high yet failed to commit to further hikes. We expect the BOJ to be cautious on policy.
Global central bank meetings take center stage this week. The Fed is likely to keep rates steady, and markets have embraced our view of higher-for-longer rates – with the next quarter-point cut not priced in until June. We think the ECB has more room for further cuts than the Fed even after three consecutive policy rate cuts. Yet like in the U.S., we see structural constraints keeping inflation and rates higher than pre pandemic.
Week Ahead
Jan. 28: U.S. durable goods; U.S. consumer confidence; Japan service PPI
Jan. 29: Federal Reserve policy decision
Jan. 30: U.S. Q4 GDP; European Central Bank (ECB) policy decision; euro area flash GDP
Jan. 31: U.S. PCE; Japan CPI
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