MARKET INSIGHTS

Weekly market commentary

May 12, 2025 | Blackrock Investment Institute
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Still selective as trade conflict cools

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Market take

Weekly video_20250513

Glenn Purves

Global Head of Macro, BlackRock Investment Institute

Opening frame: What’s driving markets? Market take

Camera frame

The latest U.S.-China deal is a major de-escalation in the trade conflict. We stay risk on, monitoring earnings reports to spot opportunities.

Title slide: Still selective as trade conflict cools

1: Hard economic rules apply

The 90-day cut to U.S.-China tariffs shows a hard economic rule shaping policy: supply chains can’t be rewired quickly without disruption. Both nations aim to avoid economic decoupling.

We still see tariffs causing further contractions in quarterly activity, but the cumulative impact may be more limited.

2: Three key themes in Q1 earnings reports

All Q1 earnings calls so far have discussed moving production to the U.S. or countries on better terms with the U.S.

There are many firms that look set to accept higher input costs. And most companies updating their spending plans are now guiding below consensus forecasts.

Yet opportunities persist in certain sectors.

3: Selective opportunities

U.S. companies started strong in Q1. We like big tech, which continues to reaffirm or increase AI-linked investment plans.

In Europe, we see opportunities in the financial sector, which has outpaced the rest of the Stoxx 600 this year. On a country level, we prefer Spain. Its growth is strong, it’s exposed to sectors that benefit from mega forces and its stocks are less exposed to U.S. tariffs.

Two other pockets of opportunity: Japan stocks and gold.

Outro: Here’s our Market take

We still see tariffs causing further contractions in quarterly activity but the cumulative impact may be more limited. Meanwhile, mega forces, fiscal spending and higher rates present select opportunities.

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

Staying selective

We still see tariffs causing further contractions in quarterly activity but the cumulative impact may be more limited. We eye opportunities from mega forces.

Market backdrop

U.S. stocks ticked down last week after a tech-driven rally over easing restrictions on AI chip exports. UK stocks rose on news of a U.S.-UK trade deal.

Week ahead

We’re looking for early signs of tariffs pushing up inflation in U.S. CPI data out this week. Sticky inflation will limit how far the Federal Reserve can cut rates.

The U.S.-China deal represents a major de-escalation in the trade conflict. Three key takeaways? First, it reaffirms that the hard economic rules we’ve been flagging will shape policy. Second, tariffs will likely bring more supply-driven contractions in quarterly activity, but the cumulative impact on overall 2025 activity could be more limited. Third, the deal gives a sense of where the U.S. effective tariff rate will settle. We stay risk on, monitoring corporate earnings reports for selective opportunities.

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Market commentary Assets class view
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Room to fall
S&P 500 earnings estimate revisions and manufacturing PMI, 1990-2025

The chart shows that earnings estimates tend to suffer sharp cuts when activity contracts.

Forward looking estimates may not come to pass. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index. Source: BlackRock Investment Institute, with data from LSEG Datastream, May 2025. Note: The chart shows the three-month revision in S&P 500 earnings estimates and the ISM Manufacturing PMI – below 50 indicates manufacturing activity falling, above 50 indicates activity growing.

The 90-day cut to U.S.-China tariffs shows a hard economic rule shaping policy: supply chains can’t be rewired quickly without disruption. That’s reflected in both nations’ explicit goal of avoiding economic “decoupling.” We still think tariffs will up inflation and hurt growth, with recession-like effects in coming quarters. Earnings estimates often suffer steep cuts when activity slumps. See the chart. Analysts have already cut forecasts for broad S&P 500 earnings growth from 14% in January to 8.5%, a slightly bigger drop than in an average year, per LSEG data. Yet the cumulative impact on overall 2025 activity may be more limited. The U.S. average effective tariff rate could land around 10-15%, we estimate, higher than at the start of 2025 but a more manageable economic disruption. We stay positive on developed market (DM) stocks and see mega forces creating select opportunities.

As we track how evolving tariffs ripple out, we see three key themes in Q1 earnings reports. First, moving production to the U.S. or countries on better terms with the U.S. has, for the first time, been discussed on all Q1 earnings calls so far, per Alphasense data. Some are now giving timelines. Second, many firms look set to accept higher input costs as supply chains adjust. The latest external estimates see tariffs denting net earnings by around 5%. Third, 60% of companies updating their spending plans are now guiding below consensus forecasts – up from 40% at the start of the year but still below the 71% hit in the pandemic, Bank of America and FactSet data show. Yet opportunities persist in certain sectors. Big tech is reaffirming or upping AI-linked investment, for example. And Q1 results show U.S. companies are starting from a position of strength.

What we like

In Europe, infrastructure and defense spending plans have led us to upgrade European equities to neutral. Yet execution of those plans is key – and the new German chancellor’s limited coalition support highlights potential obstacles. Europe’s Stoxx 600 has performed broadly on par with the S&P 500 since the April 2 tariff announcement and European earnings estimates for 2025 have fallen to 3.5% from 8% in January. Yet that masks divergence. Financials are up over 20% this year, thanks to persistently high yields and strong company and household balance sheets. We’ve preferred Spain since the start of 2025 due to strong growth and exposure to financials, utilities and infrastructure – sectors that benefit from mega forces. Spanish stocks are also less exposed to U.S. tariffs: only 5% of its exports are U.S.-bound, less than the EU average, trade data show. Japanese equities offer another bright spot: Ongoing corporate reforms keep us overweight on a currency-unhedged basis.

Structural shifts also call for selectivity in other asset classes. Gold has been a better buffer against geopolitical risks than other traditional safe-haven assets since April 2. It has soared, while long-term U.S. Treasuries and the U.S. dollar have – unusually – slid alongside stocks, Bloomberg data show. Under new regulation, U.S. banks will soon be able to treat gold as a high-quality asset on their balance sheets. That could drive demand and make gold a core holding.

Our bottom line

We still see supply disruptions upping inflation and hitting growth, but also a path to avoiding a U.S. contraction over 2025 as a whole. Mega forces, greater fiscal spending and higher interest rates are driving select opportunities.

Market backdrop

U.S. stocks ticked down last week after a tech-driven rally on reports the U.S. plans to lift restrictions on AI chip exports. The S&P 500 remains 8% below February’s record high. The UK's FTSE 250 rose more than 1% last week and hit a two-month high after the Bank of England cut rates by 25 basis points and the U.S. signed a trade deal with the UK. U.S. two-year and 10-year Treasury yields were largely steady at 3.89% and 4.39% respectively as the Federal Reserve left rates unchanged.

U.S. CPI data for April is in focus this week. While it's probably too soon to see the early April tariffs pushing up directly on inflation, we're watching for signs of an uptick in core goods prices. We think sticky inflation will make it difficult for the Fed to cut interest rates much this year as it grapples with a now sharper trade-off between protecting growth and reining in inflation.

Week ahead

The chart shows that gold is the best performing asset year to date among a selected group of assets, while Brent crude 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 May 8, 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.

May 13

U.S. CPI

May 15

Japan GDP; Philly Fed Business index

May 16

University of Michigan consumer sentiment survey

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Meet the authors
Wei Li
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Glenn Purves
Glenn Purves
Global Head of Macro – BlackRock Investment Institute
Bruno Rovelli
Bruno Rovelli
Chief Investment Strategist for Italy – BlackRock Investment Institute
Carolina Martinez Arevalo
Carolina Martinez Arevalo
Portfolio Strategist – BlackRock Investment Institute