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2025 GLOBAL INVESTMENT OUTLOOK

Building the transformation

Dec. 4, 2024 | We are not in a typical business cycle. Mega forces like AI are transforming economies, breaking historical trends. We stay risk-on as we look for transformation beneficiaries – and go further overweight U.S. stocks as the AI theme broadens out. We have more conviction inflation and interest rates will stay above pre-pandemic levels.

Investment themes

  • 01

    Financing the future

    Mega forces including AI are transforming economies. We see capital markets – especially private markets – playing a vital role in building this transformation.

  • 02

    Rethinking investing

    This transformation raises questions about how to build portfolios for an ever-changing outlook. We think investors should focus on themes and put more weight on tactical views.

  • 03

    Staying pro-risk

    We remain pro-risk and further upgrade U.S. stocks thanks to U.S. corporate strength. But we stay nimble. Key signposts for changing our views include any surge in long-term bond yields or an escalation in trade protectionism.

Read details of our 2025 outlook:

 

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Transformation underway

Historical trends are being permanently broken in real time as mega forces, like the rise of artificial intelligence (AI), transform economies. The ongoing outsized response of long-term assets to short-term news shows how unusual this environment is. We stay risk-on as we look for transformation beneficiaries – and go further overweight U.S. stocks as the AI theme broadens out. We have more conviction inflation and interest rates will stay above pre-pandemic levels.

2024 has reinforced our view that we are not in a business cycle: AI has been a major market driver, inflation fell without a growth slowdown and typical recession signals failed. Volatility surged and narratives flipflopped as markets viewed developments through a business cycle lens.

As we head into 2025, some countries have new leaders with a mandate for political and economic change. That could see policymakers pursuing measures that add to volatility rather than stability. Financial markets may work to rein in any policy extremes, such as with fiscal policy. Yet we think there will be fewer checks when stocks are running up, creating the potential for risk appetite to turn frothy.

Learning about the trend

For decades, economies followed stable, long-term trends. Investors could focus almost entirely on navigating any temporary deviations around those trends. Growth would eventually converge back toward its trend. That has been a foundational tenet of portfolio construction.

We think the environment is very different now. Economies are undergoing transformations that could keep shifting the long-term trend, making a wide range of very different outcomes possible. See the chart. What’s driving economic growth may look very different.

An ever-changing trend

Hypothetical evolution of U.S. GDP

An illustration shows two scenarios for how economic output could evolve, one with there is one single central trend line for growth and another with multiple possible trend lines

For illustrative purposes only. Source: BlackRock Investment Institute, December 2024. Note: The charts show an illustration of how economic output could evolve – the chart on the left and top right assumes there is one single central trend for growth and the chart on the bottom right assumes that there is not one single central trend for growth, but many different trends possible.

Checks and (im)balances

2024 was a major election year and a punishing one for incumbent governments. Voters expressed frustration, most notably about the higher cost of living after the pandemic, but also issues like immigration. Several countries have now seen either a change in government or the erosion of ruling party support. The desire for political and economic change could remain driving forces in 2025.

In the U.S., Republican control of both Congress and the presidency means President-elect Donald Trump could implement much of his agenda. If implemented extensively, some of his policies could reinforce geopolitical fragmentation and add to inflation. See the chart. Less government emphasis on macro stabilizing policies – like fiscal frameworks and inflation targets – would put greater onus on financial markets to enforce discipline.

Broadening protectionism

Trade restrictions, 2014-2023

The chart shows that trade restrictions around the globe have shot up since 2014, especially for goods and services

Source: BlackRock Investment Institute, IMF, with data from globaltradealert.org, December 2024. Note: The chart shows the number of unilateral non-liberalizing trade interventions (as classified by globaltradealert.org) taken by countries around the world.

What 2024 says about 2025

Markets have been more sensitive to data surprises than in the past, with even long-term assets having outsized reactions. See the chart. That reinforces volatility. Yet 2024 underscored why trying to overlay a typical business cycle on incoming U.S. data can be misleading when structural forces are at play. Inflation eased, but growth remained strong, driven by structural forces like the post-pandemic normalization of the labor and goods markets and a rise in immigration.

Looking ahead to 2025, we see persistent inflation pressures fueled by rising geopolitical fragmentation, plus big spending on the AI buildout and the low-carbon transition. Slowing immigration may exacerbate the challenges of an aging workforce, keeping wage growth elevated. The Federal Reserve is unlikely to pursue aggressive rate cuts, with rates unlikely to fall much below 4%. Given persistent budget deficits, sticky inflation, and heightened volatility, we expect long-term Treasury yields to climb as investors demand higher compensation for risk.

Sensitive to surprises

Sensitivity of U.S. 10-year yield to economic surprises, 2003-2024

The chart shows that U.S. 10-year Treasury yields have shown heightened market sensitivity to economic data surprises since 2022

Past performance is no guarantee of future results. Source: BlackRock Investment Institute, with data from LSEG Datastream, December 2024. Notes: The line shows how sensitive the U.S. 10-year Treasury yield is to economic surprises, using regression analysis to estimate the relationship between U.S. 10-year Treasury yields and the Citi Economics Surprise Index over a rolling six-month window. This is only an estimate of the relationship between the 10-year Treasury yield and economic surprises.

Meet the authors

Jean Boivin
Head of BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist, BlackRock Investment Institute
Rick Rieder
Head of Fundamental Fixed Income, BlackRock
Ed Fishwick
Head of Risk and Quantitative Analysis, BlackRock
Vivek Paul
Global Head of Portfolio Research, BlackRock Investment Institute
Raffaele Savi
Global Head of Systematic, BlackRock

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