MARKET INSIGHTS

Weekly market commentary

Jan 06, 2025

Three investment lessons from 2024

Market take

Weekly video_20250106

Wei Li

Opening frame: What’s driving markets? Market take

Camera frame

As I think about 2025, there are three lessons from last year that I think are going to be useful.

Title slide: Three investment lessons from 2024

1: Not a cycle

Number one: not a cycle. I think by now we have had plenty of evidence proving what we originally proposed as a hypothesis: that this is not your typical business cycle.

You look at how inflation fell last year without growth having to pay the price. You look at how previously failsafe recession signals [are] failing.

2: Fade cyclical interpretations

The second lesson is related, which is that a good investment strategy to consider in this period of transformation is to fade simple cyclical interpretations of what’s happening.

This is why we faded seven cuts at the beginning of 2024. This is why we faded recession fears late summer last year.

3: Expect the unexpected

We believe it’s now more important than before to expect the unexpected.

And there are two reasons for that. The first is that we’re looking at the juxtaposition of multiple big, big, big transformations. We’re talking about aging population, low-carbon transition, AI – and that means that the range of outcomes on the table are now wider than before and that by definition brings greater uncertainty.

Outro: Here’s our Market take

So bringing everything together, we continue to be pro-risk for now, but we need to signpost things that we’re watching very clearly to dial up but also dial down risk-taking as we navigate 2025.

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

Leaning against narrative shifts

2024 reinforced this is an economic transformation, not a business cycle. We lean against market moves driven by other interpretations and expect volatility.

Market backdrop

U.S. stocks surged more than 20% in 2024, driven by major tech stocks. U.S. Treasury yields ended the year above 4.50% as markets priced out Fed rate cuts.

Week ahead

We get U.S. payrolls for December this week. Market expectations of only two Federal Reserve cuts in 2025 seem reasonable given sticky inflation, we think.

Three interconnected lessons from 2024 help shape our 2025 outlook. First, this is an economic transformation, not a business cycle. We hold to that core framing. Second, as markets instead keep trying to interpret macro data as though this were a typical business cycle, that creates opportunities to lean against the resulting market moves. Third: expect the unexpected as transformation and policy changes can also create surprises, volatility – and opportunities – in these choppy waters.

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Market commentary Asset class views
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Embracing higher-for-longer
Actual fed funds range and market pricing of the end-2025 rate last year

The chart shows that market pricing of end-2025 U.S. policy rates has come up significantly in recent months.

Forward looking estimates may not come to pass. Source: BlackRock Investment Institute, with data from LSEG Datastream, December 2024. Notes: The shaded area shows the target range of the fed funds rate and the orange line shows market pricing of the fed funds rate in December 2025 implied by SOFR futures.

We enter 2025 against an unusual macro backdrop. In 2024, time-tested recession indicators failed, inflation fell even as growth stayed above the historical trend and the Federal Reserve cut rates by 100 basis points even though financial conditions were already easy. Incoming data that didn’t fit with a business cycle led to outsized market responses and abrupt shifts in narratives. This heightened market volatility creates plentiful investment opportunities, we think. Take fixed income. Fed rate cut expectations went on a historic round trip last year. See the chart. The Fed itself pivoted from talk of an easing cycle a year ago to a mere recalibration now. By year end, markets had come around to our higher-for-longer rate view. We expected inflation to cool some – as it did. Yet we long believed that sticky inflation would prevent sharp Fed rate cuts and leaned against market pricing for most of the year.

2024’s round trip in rate cut pricing shows this is not a business cycle but a transformation – our first lesson. We see mega forces, or structural shifts, reshaping economies and markets. This transformation could keep shifting the long-term activity trend, making a wide range of outcomes possible. Last year, we focused on key stock drivers: strengthening corporate earnings and free cash flow growth. This led us to stick with companies delivering on earnings even when valuation concerns flared up. We stay risk-on as we think U.S. corporate strength is the scenario most likely to play out next year. Yet we eye signposts, including greater trade protectionism, to change our view if other scenarios appear more likely. Structural changes mean rethinking long-held investment principles – like the assumption growth will eventually revert to its historical trend.

Leaning against a cyclical view

We lean against markets interpreting data through a business cycle lens, our second lesson. Such an interpretation last year spurred recession fears and brief stock selloffs. That played out in December, too, with the sharpest stock slide in decades to follow a Fed cut during a bull market, our analysis shows. Our U.S. equity overweight isn’t shaken by the Fed’s signal of fewer rate cuts – we had expected that. Our overweight is grounded in the artificial intelligence (AI) theme, robust economic growth and broadening earnings growth. Soaring tech valuations and the concentration of returns in just a few tech companies caused some market jitters. Yet we see market concentration as a feature, not a flaw, of transformation.

Transformation can happen quickly. That is why our third lesson is to expect more volatility and surprises than usual as transformation widens the range of market outcomes in real time. A year ago, the word “hyperscalers” – or large tech firms investing billions in AI – had barely entered the public lexicon. Public policy is another area we expect to see swift change. We think policymaking could itself become a source of disruption and surprises – in an already more fragile world given heightened strategic competition between the U.S. and China. Trade protectionism is shaping up to be a key risk in 2025.

Our bottom line

We carry 2024’s lessons into 2025. We got clear evidence this is a transformation, not a business cycle. And we found it helps to lean against markets adopting a business cycle lens, eyeing more surprises as the transformation unfolds.

Market backdrop

U.S. stocks surged more than 20% over the course of 2024. Mega cap tech names led the way on the AI theme – even as stocks finished the year on a down note overall after the Fed signaled a slower pace of cuts ahead at its December meeting. Markets have brought up their year-end 2025 rate expectations to nearly 4%, in line with our higher-for-longer view. U.S. 10-year Treasury yields swung in a range of nearly 100 basis points during the year, closing out 2024 near 4.58%.

We get U.S. payrolls for December this week. Wage growth remains elevated due to an unexpected rise in immigration, in our view. While wage pressures have cooled some as immigration has slowed, they remain above the level that would allow inflation to fall to the Fed’s 2% target. Given the risk of resurging inflation from potential trade tariffs and the immigration slowdown continuing, market expectations of only two more Fed policy rate cuts in 2025 now seem reasonable, we think.

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. 2, 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. 6

Global PMIs

Jan. 7

U.S. trade data; euro area CPI

Jan. 10

U.S. payrolls; University of Michigan sentiment survey

Read our past weekly market commentaries here.

Big calls

Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, January 2025

  Reasons
Tactical  
U.S. equities We see the AI buildout and adoption creating opportunities across sectors. We tap into beneficiaries outside the tech sector. Robust economic growth, broad earnings growth and a quality tilt underpin our conviction and overweight in U.S. stocks versus other regions. We see valuations for big tech backed by strong earnings, and less lofty valuations for other sectors.
Japanese equities A brighter outlook for Japan’s economy and corporate reforms are driving improved earnings and shareholder returns. Yet the potential drag on earnings from a stronger yen is a risk.
Selective in fixed income Persistent deficits and sticky inflation in the U.S. make us more positive on fixed income elsewhere, notably Europe. We are underweight long-term U.S. Treasuries and like UK gilts instead. We also prefer European credit – both investment grade and high yield – over the U.S. on cheaper valuations.
Strategic  
Infrastructure equity and private credit We see opportunities in infrastructure equity due to attractive relative valuations and mega forces. We think private credit will earn lending share as banks retreat – and at attractive returns.
Fixed income granularity We prefer short- and medium-term investment grade credit, which offers similar yields with less interest rate risk than long-dated credit. We also like short-term government bonds in the U.S. and euro area and UK gilts overall.
Equity granularity We favor emerging over developed markets yet get selective in both. EMs at the cross current of mega forces – like India and Saudi Arabia – offer opportunities. In DM, we like Japan as the return of inflation and corporate reforms brighten the outlook.

Note: Views are from a U.S. dollar perspective, January 2025. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.

Tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, January 2025

Legend Granular

Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this. It leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. The new regime is not conducive to static exposures to broad asset classes, in our view, but it is creating more space for alpha. For example, the alpha opportunity in highly efficient DM equities markets historically has been low. That’s no longer the case, we think, thanks to greater volatility, macro uncertainty and dispersion of returns. The new regime puts a premium on insights and skill, in our view.

Asset   Tactical view Commentary
Equities      
United States   United States: tactical Overweight +2 We are overweight as the AI theme and earnings growth broaden. Valuations for AI beneficiaries are supported by tech companies delivering on earnings. Resilient growth and Fed rate cuts support sentiment. Risks include any long-term yield surges or escalating trade protectionism.
Europe   Europe: tactical Underweight -1 We are underweight. Valuations are fair. A growth pickup and European Central Bank rate cuts support a modest earnings recovery. Yet political uncertainty could keep investors cautious.
U.K.   U.K.: tactical Neutral We are neutral. Political stability could improve investor sentiment. Yet an increase in the corporate tax burden could hurt profit margins near term.
Japan   Japan: tactical Overweight +1 We are overweight. A brighter outlook for Japan’s economy and corporate reforms are driving improved earnings and shareholder returns. Yet a stronger yen dragging on earnings is a risk.
Emerging markets   Emerging markets: tactical Neutral We are neutral. The growth and earnings outlook is mixed. We see valuations for India and Taiwan looking high.
China   China: Overweight+1 We are modestly overweight. China’s fiscal stimulus is not yet enough to address the drags on economic growth, but we think stocks are at attractive valuations to DM shares. We stand ready to pivot. We are cautious long term given China’s structural challenges.
Fixed income      
Short U.S. Treasuries   Short U.S. Treasuries: tactical Neautral We are neutral. Markets are pricing in fewer Federal Reserve rate cuts and their policy rate expectations are now roughly in line with our views.
Long U.S. Treasuries   Long U.S. Treasuries: tactical Underweight-1 We are underweight. Persistent budget deficits and geopolitical fragmentation could drive term premium up over the near term. We prefer intermediate maturities less vulnerable to investors demanding more term premium.
Global inflation-linked bonds   Global inflation -linked bonds : Neutral We are neutral. We see higher medium-term inflation, but cooling inflation and growth may matter more near term.
Euro area government bonds   European bonds: tactical Neutral We are neutral. Market pricing reflects policy rates in line with our expectations and 10-year yields are off their highs. Political uncertainty remains a risk to fiscal sustainability.
UK Gilts   U.K. gilts: tactical Overweight+1 We are overweight. Gilt yields offer attractive income, and we think the Bank of England will cut rates more than the market is pricing given a soft economy.
Japan government bonds   Japan government bonds: tactical Underweight -2 We are underweight. Stock returns look more attractive to us. We see some of the least attractive returns in JGBs.
China government bonds   China government bonds: tactical Neutral We are neutral. Bonds are supported by looser policy. Yet we find yields more attractive in short-term DM paper.
U.S. agency MBS   U.S. agency MBS: tactical neutral 01 We are neutral. We see agency MBS as a high-quality exposure in a diversified bond allocation and prefer it to IG.
Short-term IG credit   Short-term IG credit: tactical Overweight +1 We are overweight. Short-term bonds better compensate for interest rate risk.
Long-term IG credit   Long-term IG credit: tactical Underweight -1 We are underweight. Spreads are tight, so we prefer taking risk in equities from a whole portfolio perspective. We prefer Europe over the U.S.
Global high yield   Global high yield: tactical Neutral We are neutral. Spreads are tight, but the total income makes it more attractive than IG. We prefer Europe.
Asia credit   Asia credit: tactical Neutral We are neutral. We don’t find valuations compelling enough to turn more positive.
Emerging market - hard currency   Emerging market-hard currency: tactical Neutral 00 We are neutral. The asset class has performed well due to its quality, attractive yields and EM central bank rate cuts. We think those rate cuts may soon be paused.
Emerging market - local currency   Emerging market-local currency: tactical neutral We are neutral. Yields have fallen closer to U.S. Treasury yields, and EM central banks look to be turning more cautious after cutting policy rates sharply.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, January 2025

Legend Granular

Asset Tactical view Commentary
Equities    
 Europe ex UK Europe ex-UK: tactical Underweight -1 We are underweight relative to the U.S. and Japan, which remain our preferred markets. Valuations are fair. A growth pickup and European Central Bank rate cuts support a modest earnings recovery. Yet geopolitical tensions, domestic political uncertainty, potential tariffs, and fading optimism about China’s stimulus could weigh on investor sentiment.
Germany Germany: tactical Underweight-1 We are underweight. Valuations and earnings momentum offer modest support compared to peers, especially as ECB rate cuts ease financing conditions. Prolonged uncertainty over the next government, potential tariffs, and fading optimism about China’s stimulus could dampen sentiment.
France France: tactical Underweight -1 We are underweight. The outcome of France’s parliamentary election and ongoing political uncertainty could weigh on business conditions for French companies. Yet, only a small share of the revenues and operations of major French firms is tied to domestic activity.
Italy Italy: tactical Underweight -1 We are underweight. Valuations are supportive relative to peers, but past growth and earnings outperformance largely stemmed from significant fiscal stimulus in 2022-2023, which is unlikely to be sustained in the coming years.
Spain Spain: tactical neutral We are neutral. Valuations and earnings momentum are supportive compared to other euro area stocks. The utilities sector stands to gain from an improving economic backdrop and advancements in AI.
Netherlands Netherlands: tactical Underweight -1 We are underweight. The Dutch stock market’s tilt to technology and semiconductors—key beneficiaries of rising AI demand—is offset by less favorable valuations and a weaker earnings outlook compared to European peers.
Switzerland Switzerland: tactical Underweight -1 We are underweight, consistent with our broader European view. Earnings have improved, but valuations remain elevated compared to other European markets. The index’s defensive tilt may offer less support if global risk appetite stays strong.
UK UK: tactical neutral We are neutral. Political stability could improve investor sentiment. Yet an increase in the corporate tax burden could hurt profit margins near term.
Fixed income    
Euro area government bonds Euro area government bonds: tactical neutral We are neutral. Market pricing aligns with our policy rate expectations, and 10-year yields have retreated from their highs. Political uncertainty poses risks to fiscal sustainability, but select peripheral markets are bolstered by stronger growth and improving credit ratings.
German bunds German bunds: tactical neutral We are neutral. Market pricing aligns with our policy rate expectations, and 10-year yields have eased from their highs, partly due to growth concerns. We are watching the fiscal flexibility debate ahead of upcoming elections.
French OATs French OATs: tactical neutral We are neutral. France faces challenges from elevated political uncertainty, persistent budget deficits, and a slower pace of structural reforms. The EU has already warned the country for breaching fiscal rules, and its sovereign credit rating was downgraded earlier this year.
Italian BTPs Italian BTPs: tactical Neutral We are neutral. The spread over German bunds looks tight given its budget deficits and debt profile, prompting a warning from the EU. Other domestic factors remain supportive, with growth holding up relative to the rest of the euro area and Italian households showing solid demand to hold BTPs at higher yields.
UK gilts UK gilts: tactical overweight+1 We are overweight. Gilt yields offer attractive income, and we think the Bank of England will cut rates more than the market is pricing given a soft economy.
Swiss government bonds Swiss government bonds: tactical neutral We are neutral. The Swiss National Bank has cut policy rates this year as inflationary pressures eased but is unlikely to reduce rates significantly further.
European inflation-linked bonds Euro area inflation-lined bonds: tactical neutral We are neutral. We see higher medium-term inflation, but cooling inflation and sluggish growth may matter more near term.
European investment grade credit European investment grade credit: tactical Neutral We are neutral on European investment grade credit, favoring short- to medium-term paper for quality income. We prefer European investment grade over the US, as spreads are relatively wider.
European high yield European high yield: tactical Overweight +1 We are overweight. The income potential is attractive, and we prefer European high yield for its more appealing valuations, higher quality, and shorter duration compared to the US. In our view, spreads adequately compensate for the risk of a potential rise in defaults.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, January 2025. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

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

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