Jean Boivin – Head of BlackRock Investment Institute together with Wei Li – Global Chief Investment Strategist, Vivek Paul – Global Head of Portfolio Research and Raffaele Savi – Head of Systematic, 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
Alpha abounds : U.S. tariffs may drive more dispersion in market and security returns, creating yet more opportunity to earn alpha. We stay risk on and overweight U.S. equities.
Market backdrop : U.S. stocks ticked down and European stocks rose 1% last week after the U.S. tariff pause was extended. U.S. 10-year Treasury yields edged higher.
Week ahead : We’re eyeing global inflation data this week. We see early signs of tariff impacts in some parts of U.S. CPI but watch for more price hikes as inventories run out.
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The muted market reaction to last week’s extension of the U.S. tariff pause shows what we’ve long argued: immutable economic laws limit how fast the world can change. We stay overweight U.S. stocks, but don’t rule out more sharp near-term market moves. Uncertainty on who will bear tariff costs means yet more dispersion in returns – and more opportunity to earn alpha, or above-benchmark returns. Two ways to do so: dynamically managing macro risk and taking security-specific risk.
We’ve long said that immutable economic laws – like supply chains can’t be rewired fast without major disruption – will prevent U.S. tariffs rising back to April 2 levels. The extension of the tariff pause to August supports that thesis. Yet wherever tariffs land, it’s not yet clear who will bear the cost: companies, consumers or exporters. That uncertainty will heighten already elevated dispersion. Before the pandemic, when the macro environment was more stable, persistent factor exposures – such as to growth, value or inflation – typically didn’t hurt portfolios. That’s no longer so. For investors, we think this requires watching for unintended static factor exposures and deploying active strategies to capture the additional alpha on offer. Since 2020, top-performing portfolio managers have delivered more alpha. For median managers, static factor exposures now drag more on returns. See the chart.
One way to capture that alpha? Reduce the potential drag from static factor exposures by deliberately managing macro risk. That requires assessing the current macro environment. If your assessment of it changes, it means pivoting quickly. And if it hasn’t changed, it means looking through the noise and leaning against sharp market swings – a particularly rewarding strategy this year, as macro fundamentals are little changed so far. In both cases, it is about being decisive about whether to “stick or twist” with current allocations. Our approach now is to “stick.” Though the joint drop in U.S. stocks, bonds and the dollar in April spurred questions about the long-term appeal of U.S. assets, we think the current economic setup still supports U.S. outperformance. We’ve seen volatility in markets, but it hasn’t shown up in U.S. earnings. That consistency still counts.
Taking security-specific risk
Another approach to capturing alpha: avoiding macro factor risk in favor of security-specific risk. We see the AI mega force continuing to power U.S. earnings growth – yet think some sectors and companies within that theme are positioned to perform better than others. After ChatGPT emerged, virtually any stock aligned with the AI theme got a boost – but now, we’re seeing outperformance concentrated among an increasingly small group of companies. The “Magnificent Seven” of mostly big tech companies are expected to post 14.8% growth in the second quarter, versus just 1.9% for other S&P 500 companies. And even within the Mag 7, we’re starting to see increased dispersion as certain companies capture the greatest benefits from the AI buildout (the race to build the infrastructure it needs) while others lead the way on AI adoption (with AI packaged into different apps and software). This creates alpha opportunities for those with insight into potential winners.
More broadly, we believe these mega forces are transforming the global economy. But no one yet knows the end state of that transformation. So, it will be key to quickly adapt portfolios – on both the tactical and longer-term, strategic horizon – as we learn more about that future world. Based on what we know now, and applying a granular lens, we like EU and U.S. financials, EU and U.S. industrials as domestic production and defense spending increase and U.S. healthcare given population aging.
Our bottom line
U.S. tariffs could intensify already elevated dispersion, making this a more rewarding environment for alpha. Dynamically managing macro risk and taking security-specific risk can help capture it. We eye selective global opportunities.
Market backdrop
The S&P 500 ticked down last week. Tech stocks and U.S.-EU trade deal hopes had briefly driven the index to new highs even after the U.S. tariff pause extension. Europe’s Stoxx 600 rose over 1%, near three-month highs. U.S. 10-year Treasury yields ticked up to 4.42% after easing earlier in the week due to a strong bond auction. We’re watching the market’s ability to absorb heavy bond supply, as the U.S. “Big Beautiful Bill” could widen fiscal deficits and trade tensions could cool foreign demand.
This week, we’re watching inflation data across the world, focusing on the U.S. Core CPI rose slightly less than expected in May but showed some signs of tariffs feeding through to some consumer prices, like in appliances. We believe most of the impact is yet to come and will build up after companies run through the inventories they imported before tariffs were set.
Week Ahead
July 14 : China trade balance
July 15 : U.S. CPI; China GDP
July 16 : UK CPI
July 18 : Japan CPI
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