Market take
Weekly video_20260518
Devan Nathwani
Portfolio Strategist
BlackRock Investment Institute
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CAPITAL AT RISK. MARKETING MATERIAL.
Opening frame: What’s driving markets? Market take
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Title slide: Upgrading developed equities
Mega forces are reshaping portfolio opportunities over a strategic horizon of five years or more. Their latest manifestation shifts where we take growth risk.
1: Multiple possible outcomes
Markets are being pulled in different directions by competing mega forces, namely AI and geopolitical fragmentation. AI is driving stocks higher, but we can’t say for sure what mega force will dominate over the long term. That’s why our capital market assumptions – for professional investors only – anchors to multiple plausible scenarios.
In one, AI could drive a productivity boom that supports growth, earnings and equity valuations. In another, geopolitical fragmentation fuels stagflationary pressure, resulting in weaker equity valuations as investors demand more compensation for taking growth risk. Our starting point represents our latest thinking of how these mega forces will evolve.
2. Strong earnings boost developed market stocks
Earnings momentum for developed market stocks looks strong. Only three quarters since 1988 have seen bigger jumps in expected 24-month U.S. equity earnings than we’ve seen for each of the past two quarters.
AI’s impact is also cutting across asset class labels, as the tech sector is now a larger share of the MSCI Emerging Markets index than for the S&P 500. The granular impact of mega forces underpins our developed equity upgrade and existing emerging equity overweight on a strategic horizon of five years or more.
3. Total portfolio implications
Our upgrade of developed equities means reducing exposure to fixed income. We like high yield in fixed income, but don’t build portfolios in asset class silos. So we downgrade high yield on a strategic horizon because we prefer to take growth risk through equities. We reduce developed market government bonds to underweight and continue to prefer inflation-linked government bonds. Why? We prefer to hold less duration risk at the total portfolio level and see inflation being more persistent than markets expect.
Outro: Here’s our Market take
Solid momentum in earnings growth leads us to upgrade developed market equities over a longer-term horizon. We adjust for that by downgrading high yield credit.
Closing frame: Read details: blackrock.com/weekly-commentary