Jean Boivin – Head of BlackRock Investment Institute together with Wei Li – Global Chief Investment Strategist Vivek Paul – Global Head of Portfolio Research and Devan Nathwani – 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
Multiple scenarios : We use multiple scenarios in our strategic views to help us adapt portfolios fast as today’s economic transformation unfolds. We like private markets across all.
Market backdrop : U.S. stocks climbed back near all-time highs as Q2 earnings keep beating expectations. European stocks outperformed on hopes for a Ukraine ceasefire.
Week ahead : We watch U.S. CPI for tariff impacts broadening out and any signs of slowing growth easing services inflation.
Mega forces are shaping an economic transformation with an unknown end. We won’t have answers for some time to big questions about the future shape of the world, making long-term investing more challenging. That’s why we’ve evolved our approach to now assess scenarios instead of one base case. Our starting point scenario is broadly the status quo: immutable economic laws mean the world can’t change quickly. We see private markets as a core allocation across scenarios.
The global transformation shaped by artificial intelligence (AI) and other mega forces raises some big questions about strategic asset allocation. Will fiscal worries spur investors to demand more compensation to hold long-term government bonds? Will the U.S. dollar stay a haven? We may not be able to answer all of these for a while. But two things we know that can inform our strategic views today: immutable laws – like supply chains can’t rewire overnight – mean the world can’t change quickly, and mega forces are now the key anchor shaping returns now and long term given the many unknowns of the macro outlook. An example? Big tech companies are boosting their AI investment even as tariffs threaten growth. The surge in tech and software spending in U.S. Q2 GDP – even larger than during the 1990s tech boom – highlights the AI theme’s growing macro impact. See the chart.
This all feeds into the new way in which we now think about strategic investing on horizons of five years and beyond. Transformation means long-term macro anchors like stable growth and low inflation no longer hold. Strategic outcomes are now less predictable because investors can no longer assume returns will converge to historical averages. Given the range of vastly different potential outcomes, we think determining strategic views on a base case – one that is tweaked over time – is no longer sufficient. Instead, we have developed multiple sets of long-run capital market assumptions (for professional investors) to help us adjust quickly as the future comes into view.
Multiple scenarios
One scenario is an AI upside: faster-than-expected AI adoption spurs a broad productivity boost, unlocking higher growth and softer inflation. We’d expect strong performance in equities, with U.S. outperformance thanks to its AI leadership and the resulting corporate earnings strength. Another scenario: a downside due to geopolitical reordering where tariff negotiations fail, trust in U.S. institutions declines and investors demand more compensation for their risk in financing U.S. corporates.
Yet we still need a best guess of what the world will look like in five years to build portfolios now. Immutable laws limit how fast the global financial structure can change, so our current strategic views are informed by our starting point scenario that largely reflects today’s world. In this scenario, U.S. assets stay core to portfolios; inflation stays above central bank targets; global growth dips below pre-pandemic trend; and investors want more term premium to hold long-term government bonds. We go underweight global investment grade credit in favor of non-U.S. government bonds due to tighter credit spreads. We like emerging market equities, particularly India, which sits at the crosscurrent of several mega forces. We’ve long liked private markets to capture mega forces, especially private credit as part of the future of finance and infrastructure. We see them as a cornerstone – not an add-on – in all scenarios, but the mix varies. Private markets are not suitable for all investors.
Our bottom line
Mega forces are driving a transformation with an unknown end – changing strategic investing. We consider scenarios to help us adapt quickly but see private markets helping investors benefit from mega forces across outcomes.
Note: The Global weekly commentary will resume on Tuesday, Sept. 2.
Market backdrop
U.S. stocks pushed back toward all-time highs, with the S&P 500 gaining about 2% on the week and tech shares outperforming. A solid Q2 earnings season has provided investors some relief: about 80% of companies have beat expectations, according to LSEG data. European stocks outperformed on hopes for a ceasefire in Ukraine. U.S. Treasury yields edged up over the week. Markets are mostly pricing in a quarter-point Federal Reserve rate cut at its September meeting.
This week, we’re watching U.S. core goods CPI to see if tariffs – already nudging prices up in some sectors – are starting to raise prices across a wider set of goods. More broadly, we watch for any signs that slower growth – as reflected in the latest U.S. payrolls data – is easing core services inflation.
Week Ahead
Aug. 12 : U.S. CPI, UK unemployment
Aug. 14 : UK GDP
Aug. 15 : US retail sales, Japan GDP
Aug. 8-15 : China July CPI
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