MARKET INSIGHTS

Weekly market commentary

Why now is a great time for alpha

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Weekly video_20250714

Vivek Paul

Global Head of Portfolio Research, BlackRock Investment Institute

Opening frame: What’s driving markets? Market take

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Even after the extension of the U.S. tariff pause, uncertainty on who will bear the cost of tariffs means even greater dispersion in returns – and more opportunity to earn alpha, or above-benchmark returns.

Title slide: Why now is a great time for alpha

1: Greater potential alpha on offer

Wherever tariff levels land, some companies will be better able to pass on the cost than others. We think this will boost already elevated dispersion.
Unlike when the macro environment was more stable, persistent factor exposures – such as to growth, value or inflation – can now hurt portfolios. For investors, we think this requires watching for unintended static factor exposures and deploying active strategies to capture the additional alpha on offer.

2: Deliberately managing macro risk

What’s one way to do that? Reduce any drag from factor exposures by deliberately managing macro risk.

That can mean pivoting quickly as the macro situation changes – or leaning against market panic.

In both cases, it means understanding the current macro environment and being decisive about whether to stick or twist with current allocations.

3: Taking security-specific risk

Another approach to capturing alpha: avoiding macro factor risk in favor of security-specific risk.

Even within the magnificent seven of mostly big tech companies, we’re starting to see increased dispersion as certain companies capture the greatest benefits from the buildout of AI infrastructure and AI adoption. This creates alpha opportunities for those with insight into potential winners.

Outro: Here’s our Market take

We stick with our current overweight to U.S. stocks. Market volatility hasn’t shown up in U.S. corporate earnings and underlying economic conditions haven’t changed much for now.

Closing frame: Read details: blackrock.com/weekly-commentary

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.

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.

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Greater potential alpha on offer
Three-year excess returns of U.S. equity fund managers, 2010-2025

The chart shows three-year excess returns of U.S. equity fund managers between 2010 and 2025. Top-performing alpha-seeking managers are delivering more alpha in this environment. But static factor exposures drag more on returns for median managers.

Past performance is not a reliable indicator of future performance. This information should not be relied upon by the reader as research or investment advice regarding any funds, strategy or security. Source: BlackRock Investment Institute, with data from eVestment and LSEG Datastream, July 2025. Notes: The chart compares the rolling three-year average excess return (into alpha and factor contribution) between 2010-2019 and 2020-2025 – excluding January-June 2020 for both top-quartile and median quartile U.S. large cap equity managers in the eVestment universe. We use regression analysis to estimate the relationship between alpha-seeking manager performance and market conditions. Regression analysis is backwards-looking and is only an estimate of the relationship. The future relationship may differ.

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

The chart shows that gold is the best performing asset year to date among a selected group of assets, while U.S. dollar index is the worst.

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of July 2, 2025. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (U.S., Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.

July 14

China trade balance

July 15

U.S. CPI; China GDP

July 16

UK CPI

July 18

Japan CPI

Read our past weekly market commentaries here.

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Meet the authors
Jean Boivin
Head – BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Vivek Paul
Global Head of Portfolio Research – BlackRock Investment Institute
Raffaele Savi
Global Head of Systematic — BlackRock