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Triggers to change our pro-risk view

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­Market take

Weekly video_20250113

Wei Li

Opening frame: What’s driving markets? Market take

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We think U.S. equity gains stay strong. Yet an economic transformation and global policy changes could spur volatility.

That calls for outlining triggers for adjusting our views.

Title slide: Triggers to change our pro-risk view

1: Tracking U.S. policy changes

First, we’re focusing on how U.S. trade, fiscal and regulatory policy changes take shape.

In a market-friendly approach, rolling back banking regulation could boost economic growth and risk asset gains. Efforts to reduce deficits could encourage other countries to loosen fiscal policy.

Yet plans to extend tax cuts plus broad and large-scale tariffs could support market less by bolstering deficits and inflation.

2: Eagerly awaiting earnings

We’re also watching how investor sentiment could respond to corporate earnings results and lofty tech valuations.

We expect earnings growth to keep broadening beyond tech. Yet the “magnificent seven” are still expected to drive overall earnings.

3: Bond market blues

Finally, we’re monitoring vulnerabilities in public markets – including an already jittery bond market.

It’s unclear how well markets can absorb record U.S. Treasury issuance that has helped drive term premium to its highest level in a decade.

Outro: Here’s our Market take

We see U.S. equity performance cooling from its highs this year but still staying strong, while U.S. Treasury yields will climb due to rising term premium.

That supports our overweight to U.S. stocks and underweight to long-term Treasuries.

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

Three triggers

We are pro-risk to start 2025. Yet we’re ready to evolve our view if policy shifts, corporate earnings and financial market cracks spell a deteriorating outlook.

Market backdrop

U.S. stocks slid and 10-year U.S. Treasury yields climbed near 4.80% last week after a strong U.S. jobs report. UK gilt yields jumped on fiscal outlook concerns.

Week ahead

We get U.S. CPI this week. Robust wage growth and sticky core services inflation should keep broad inflation from falling to the Federal Reserve’s target, we think.

We are pro-risk, with the biggest overweight in U.S. stocks, yet eye three areas that could spur a view change. First, we’re watching policy, notably how U.S. tariffs and fiscal policy shape up. Second, we watch whether investor risk appetite will sour due to corporate earnings and lofty tech valuations amid the artificial intelligence (AI) buildout. Third, we look for elevated vulnerabilities, like surging bond yields as markets price out rate cuts and corporate debt refinancing at higher interest rates.

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Going up
Change in U.S. 10-year Treasury yields through rate cutting episodes, 1984-2024

The chart shows the unusual yield jump in 10-year U.S. Treasury yields since the Federal Reserve started cutting interest rates.

Past performance is not a reliable indicator of current or future results. Source: BlackRock Investment Institute, with data from Haver Analytics, January 2025. Note: The chart shows the change in 10-year Treasury yields through periods when the Federal Reserve cut interest rates. The shaded area shows the range of those changes since 1984 and the dotted green line shows the average. The orange line shows the change in yields since the Fed’s cut in September 2024.

We upped our U.S. equities overweight in December as we expected AI beneficiaries to broaden beyond tech given resilient growth and Fed rate cuts. We think U.S. equity gains could roll on. Yet an economic transformation and global policy shifts could push markets and economies into a new scenario from our 2025 Outlook. We look through near-term noise but outline triggers for adjusting our views, by either dialing down risk or shifting our preferences. First, we’re tracking the impacts of global policy – especially U.S. trade, fiscal and regulatory policy. Second, we gauge whether risk appetite will stay upbeat as earnings results for AI beneficiaries come in and given high tech valuations. Third, vulnerabilities like a sudden jump in bond yields could also shift our view. The unusual yield jump since the Fed started cutting rates underscores this is a very different environment. See the chart.

The first trigger to change our view is whether or not President-elect Donald Trump takes a market-friendly approach to achieve goals like improving growth and reducing budget deficits. In a market-friendly approach, rolling back financial regulation and cutting government spending could boost economic growth and risk assets. That, plus efforts to rebalance global trade and expand fiscal stimulus in countries where investment and consumer spending have lagged the U.S., may help address trade deficit worries. In a less market-friendly approach, plans to extend tax cuts alongside large-scale tariffs could deepen deficits and stoke inflation. More broad-based tariffs could strengthen the U.S. dollar, fuel inflation and call for high-for-longer interest rates. This plan would clash with Trump’s calls for a weaker dollar to boost U.S. manufacturing and his push for rate cuts. We look through noisy headlines around policy and focus on how policy changes take shape this year.

Sentiment and financial cracks

The second trigger: deteriorating investor sentiment due to earnings misses or lofty tech valuations. The “magnificent seven” of mostly tech companies are still expected to drive earnings this year as they lead the AI buildout. Their lead should narrow as resilient consumer spending and potential deregulation support earnings beyond tech. While earnings might surprise to the upside, any misses could renew investor concern over whether big AI capital spending will pay off and if high valuations are justified – even if we think valuations can’t be viewed through a historical lens as an economic transformation unfolds.

In our third trigger, we’re watching for elevated vulnerabilities in financial markets – including an already jittery bond market. We expect bond yields to climb further as investors demand more term premium for the risk of holding bonds. Term premium is rising from negative levels and is at its highest in a decade, LSEG Datastream data show. The surge in UK gilt yields shows how concerns about fiscal policy can drive term premium – and bond yields – higher. The refinancing of corporate debt at higher interest rates is another risk. It could challenge the business models of companies that assumed interest rates would remain low. But many companies have refinanced debt without defaulting since the pandemic given strong balance sheets.

Our bottom line

We see U.S. equity gains cooling from their highs this year but staying strong, while U.S. Treasury yields climb. We stay overweight U.S. stocks and underweight long-term Treasuries, yet we’re watching triggers to change our views.

Market backdrop

U.S. stocks fell more than 1% last week. Ten-year U.S. Treasury yields climbed near 4.80%, to a 14-month high and near their 2023 peak partly due to a surprisingly strong U.S. jobs report. The data suggest immigration is still making it possible to sustain larger job gains without adding to wage pressures. Yet wage gains are still strong enough for the Fed to keep policy rates higher for longer. UK 30-year gilts yields hit their highest in almost three decades on concerns about the UK fiscal path.

U.S. CPI is in store this week. We watch for whether inflation stays sticky in line with the recent trend. Wage growth and core services inflation remain at a level inconsistent with overall inflation falling back to the Federal Reserve’s 2% target, in our view. Longer term, we think labor supply constraints like population aging should keep inflation sticky, preventing the Fed from cutting policy rates much below 4% – much higher than pre-pandemic levels.

Week ahead

The chart shows that gold is the best performing asset in the past 12 months among a selected group of assets, while the U.S. 10-year Treasury 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 Jan. 9, 2025. Notes: The two ends of the bars show the lowest and highest returns at any point in the past 12 months, and the dots represent current 12-month 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.

Jan. 13

China trade data

Jan. 15

U.S. CPI; UK CPI

Jan. 16

UK GDP

Jan. 10-17

China total social financing

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
Glenn Purves
Global Head of Macro Research – BlackRock Investment Institute
Bruno Rovelli
Chief Investment Strategist for Italy – BlackRock Investment Institute

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