Jean Boivin – Head of BlackRock Investment Institute together with Wei Li – Global Chief Investment Strategist, Glenn Purves – Global Head of Macro and Vivek Paul – Global Head of Portfolio Research, 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
Risk-on amid rate cuts : We stay risk-on heading into Fed rate cuts as growth slows but holds up and corporate earnings remain solid. We up long-term U.S. Treasuries to neutral.
Market backdrop : U.S. stocks surged to new all-time highs on the AI theme. U.S. bond yields dipped to five-month lows. The U.S. CPI showed core inflation is proving sticky.
Week ahead : We look for a widely expected Federal Reserve rate cut this week amid a murky macro backdrop. We also watch central bank meetings in Japan and the UK.
We stay risk-on as the Federal Reserve likely resumes cutting policy rates this week. A softening labor market gives the Fed space to cut, helping ease brewing political tensions from higher interest rates. We think rate cuts amid a notable slowing of activity without recession should support U.S. stocks and the AI theme. We turn neutral long-term U.S. bonds: yields could fall further near term even if the structural pressures driving them up, including loose fiscal policy globally, persist.
We stay risk-on as a much softer U.S. labor market should ease inflation pressures and give the Fed justification to resume easing policy. Until recently, we saw sticky inflation as complicating the Fed cutting rates. Inflation has fallen this year even as U.S. tariffs halted a decades-long spell of goods deflation. This was possible due to surprisingly weak services inflation – a puzzle given a strong labor market. Then job gains stalled in recent months, suggesting an ongoing cooling of services inflation. See the chart. We see risks to that view, partly because it’s unclear why the labor market is soft. We may be in an unusual “no hiring, no firing” state: Fed rate cuts could boost confidence and spark hiring again just as inflation is still far above the Fed’s target. This could reignite political tensions between inflation and debt servicing costs – leading to a steeper U.S. yield curve and more cautious risk stance.
We stay risk-on as we have been since the policy-driven volatility in April. U.S. equities are among the best-performing markets since then: U.S. stocks are up 31% since April 8 versus 24% for overall developed markets, according to LSEG data. The lesson? Immutable economic laws – supply chains can’t be rewired overnight without major disruption – limit rapid policy change. This framing allowed us to lean against markets extrapolating big calls – and quickly deploy risk. Yet the market environment has changed a lot. The drivers have shifted from tariffs and policy uncertainty – which sparked questions about the appeal and haven status of U.S. assets – to the tensions between inflation, growth and government debt.
AI theme still leading the way
We stick with the AI theme. The AI theme keeps driving U.S. equity performance, with the tech sector accounting for over 40% of total return and a similar share of earnings growth, LSEG data show. We think this can persist. Yes, these companies are generating less free cash flow, but only modestly. We think elevated valuations can be justified if they keep delivering on expected 15% to 20% future earnings growth. Their credit spreads – a sign of balance sheet health – have also held steady near historic lows but we watch them as a potential warning sign of market concerns.
We need to be ready for a few very different macro scenarios in coming months. Our base case: A soft labor market allows the Fed to cut rates, a positive for equities. This could spark broader equity gains and support long-term bonds. On a six- to 12-month tactical horizon, we go neutral long-term U.S. Treasuries after having long been underweight. We also flip neutral on short-term Treasuries from overweight. Yet if the labor market were to weaken much more, Fed rate cuts won’t be enough to offset the pressure on risk assets, in our view – and we would be ready to reduce risk. On the flip side, a hiring rebound could stoke inflation pressures and put the spotlight on Fed independence again, prompting investors to seek more compensation for the risk of holding long-term bonds. We prefer real, or inflation adjusted, yields to lock in income. On a strategic horizon, we stay underweight long-term government bonds and prefer inflation-linked bonds. We stand ready to pivot in all scenarios.
Our bottom line
A softer labor market and slowing growth pave the way for the Fed to cut rates. We think this will benefit U.S. stocks and stay overweight. We close our long-term U.S. Treasuries underweight but see pressures for higher yields staying.
Market backdrop
U.S. pushed to new record highs, with the S&P 500 rising about 2% on the week to take its gains for the year to 12%. Tech stocks outperformed on the AI theme, with shares of Oracle surging on major cloud demand from AI customers. Ten-year U.S. Treasury yields were mostly steady near 4.00% but dipped to a five-month low. The U.S. CPI data for August showed core inflation is proving sticky even as the Fed readies to resume rate cuts this week given a softening jobs market and economy.
The Fed is poised to resume cutting interest rates this week. A softer labor market gives the Fed room to cut without raising questions about its independence. Yet core inflation remains sticky, and we see this moment as an important fork in the road for the macro outlook depending on labor market developments. Both the Bank of Japan and Bank of England are expected to keep policy rates on hold next week.
Week Ahead
Sep. 17 : Federal Reserve policy meeting
Sep. 18 : Bank of England policy meeting
Sep. 19 : Bank of Japan policy meeting , Japan CPI
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