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February Advisor Outlook

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Hi, I'm Carolyn Barnette, head of BlackRock's market and portfolio insights team for US wealth. and I'm here with your advisor outlook update for February 2025. And look, there have been no shortage of things making the news headlines over the past month. from the flurry of executive orders that we've seen out of a new White House, to the volatility we've seen in tech stocks following, all the news around DeepSeek to a ten year Treasury that continues to perhaps confound and surprise as it bounces around.

But you take all of that, and you step back and you think, well, what actually might
impact the way we build portfolios? I mean, you can really boil that down into three key themes, for the month ahead. first and foremost, we're continuing to lean in to U.S. large caps, despite the volatility that we've seen here.

There are a lot of things that make us optimistic on this part of the market. On the bond side, we are we continue to be concerned about the volatility in the long bond space and instead are more excited about leaning into plus sector bonds, things like CLOs, floating rate bonds, higher quality, high yield, for both yield and balance.

And then third, continuing to look to alternatives for diversification for a portfolio where we've seen elevated stock bond correlations that perhaps prevent bonds from being as good at diversification as they had been we're really excited about what we've seen, within alternatives as a way to diversify portfolio risk. So let's talk first and foremost about the why behind equities.

It's natural, after two years in a row of really strong returns out of U.S. stocks and growth stocks in particular, to ask whether that's warranted or if things are just getting too expensive. And I think it's really interesting to note here that you look at last year's performance and you see, particularly in the large cap growth space, that most of that performance was driven by earnings growth.

There's a little bit of multiple expansion there. But most of that was coming from
earnings growth, which really lets us say that perhaps valuations are justified in that
part of the market. Perhaps there may even be more room to run. You compare that to something like small caps, where pretty much all of their performance, was multiple expansion, very little in the way of earnings growth, or even European stocks where they actually earnings growth contracted.

And that really reinforces our case for why we're most excited about U.S. stocks and
large caps in particular. Now you look over into bonds. and what you've seen is really
longer term bond yields rise. And that's really a function of what's good for stocks has been bad for bonds. we've had kind of positive surprises on the economy that's buoyed corporate stock earnings.

And has also made the Fed feel like they perhaps don't have as much pressure to lower interest rates as they might have prior. So you are seeing higher long term yields, that expectation of higher rates for longer, because of that positive economic outlook and also the fact that inflation has not yet hit target. What that has felt like over the past few years is pretty much extreme volatility out of long bonds.

And I don't have to tell any of you about that. And that has been pretty challenging, for us all to navigate. And the worst part of it is you have that, higher volatility, you have higher correlations with stocks. And what that has resulted in is a 6040 portfolio that today, is feeling a whole lot riskier than the 60/40 of years past, even just a few years ago.

So what do you do about it? Counterintuitively enough, one of the best things that you might be able to do for your bond portfolio is introduce higher yielding bonds. we did this case study where we took just the aggregate bond index. and we first looked at, well, what happens if you just lower duration? It lowers risk by a teeny tiny bit.

If you go all the way out there and you add a really big allocation to higher yielding
bonds, what you see is that the risk comes down by quite a bit. The yield goes up by
quite a lot. and that actually ends up being a better portfolio for this particular
environment. And you get that because you have this kind of zero correlation between interest rates and credit spreads.

That allows credit to be a really good diversifier of interest rates within your bonds. Now, asset allocators might want to go one step further than that as well. because while that can go a long way towards reducing portfolio risk, adding alternatives can go a long way towards really improving portfolio outcomes. when markets do go down, and we saw this because over the last three years there have been 14 months where stock markets have fallen.

The S&P 500 has been down over those 14 months. Bonds lost money in all 14 of those months, and they actually participated in a good amount of the downside there. On the other hand, alternative strategies, particularly alternative strategies with lower correlation to equities such as the equity market neutral category, they were able to provide a bit more cushion.

And in fact, the average equity market neutral fund was up in ten of those 14 down
months for the S&P 500. So it could really be helpful to a portfolio, to not only build
balance within your bond sleeve, but also add in alternatives that have low to negative correlations to stocks. So to wrap it all up, really three ideas that we ran through, for today's market environment, first and foremost, staying overweight equities and staying overweight U.S large caps in particular.

Second, building balance into your bond sleeve, introducing more plus sector exposure, to complement the interest rate heavy core bond exposure. And third is using alternatives as ways to diversify risk and possibly even amplify returns. If you want more information, you can feel free to check out the whole, entire advisor outlook deck. you can also reach out to your local market team or call 877-Ask-1BLK

FOR FINANCIAL PROFESSIONAL USE ONLY. NOT TO BE SHOWN OR DISTRIBUTED
TO CLIENTS.

The opinions expressed are those of speakers and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. Investment involves risk. Information and opinions are derived from proprietary and non-proprietary sources. Performance shown is past performance and is no guarantee of future results. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index.

This material is prepared by BlackRock and is not intended to be relied upon as a
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Leaning into U.S. large caps

U.S. large cap earnings remain robust, and we’re seeing earnings growth momentum expanding beyond just growth and tech.

Challenging rate outlook suggests a lean towards carry

We see limited upside in long duration bonds today and believe it may be prudent to balance risk and increase yield with “plus sector” bonds.

Alternatives may provide critical diversification

Elevated bond market volatility and stock/bond correlations suggest seeking out alternative strategies with low correlations to traditional assets.

Our best ideas for today's markets

Lean into U.S. large caps
DYNF actively adjusts factor exposures in response to market conditions and seeks to outperform the broad U.S. equity market.
Balance risk within bonds
BINC opportunistically seeks to maximize income across a broad range of global fixed income sectors.
Get creative with diversification
BDMIX seeks to capitalize on stock opportunities in a market-neutral manner, aiming for returns with low correlations to stocks and bonds.

To obtain more information on the fund(s) including the Morningstar time period ratings and standardized average annual total returns as of the most recent calendar quarter and current month end, please click on the fund tile. Past performance is not indicative of future results. The Morningstar RatingTM for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure (excluding any applicable sales charges) that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

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TIMELY WEBINARS FOR ADVISORS

Stay "In The Know"

Stay informed and ahead of the curve! Our monthly webinar, In the Know, keeps you updated on the latest market trends and product guidance for advisors. Each session features insights from industry experts. See below to review the latest month's recap.

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Hi everyone. I’m Carolyn Barnette, Head of Market and Portfolio Insights for US Wealth, here with a few key takeaways from our In the Know Webinar on our 2025 outlook.

So, look, first and foremost, I’d say we are very optimistic for the year, particularly on US Equities. We see a lot of room for growth there. You know, Alister Hibbert, the Portfolio Manager for our Unconstrained Equity Fund, said it’s always easier to sound smart when you’re sounding bearish and talking about all the risks, but we’re not seeing anything in markets right now to suggest that bearish view. 

If anything, to think that valuations aren’t justified, you’d need to expect profit margins to come down, and again, not seeing any suggestions that that could happen. So, definitely staying overweight equities, overweight US equities in particular. 

On the bond side, certainly seeing some risk to longer duration assets. You did see the Fed start their cutting cycle, but you also saw longer-term treasury yields rise as the Fed was lowering interest rates with the potential for persistent inflation, with the potential high deficits. We’re still concerned about the risks involved in long-dated treasuries, and so instead what we prefer to do is really build balance into our fixed income sleeves. 

Part of that is leaning into shorter and intermediate dated core bonds on the high quality side, and part of that is also shifting more of our fixed income portfolios towards what we call plus sectors, which could be high yield bonds, but other bonds that are delivering a spread over treasuries like securitized debt where you can get higher yields with potentially less risk and also have a nice balancing effect for your high quality bonds. 

The third thing that we’re really excited about and that we’ve seen work over the past few years is alternatives. So, we talked a little bit about the fact that we’ve seen 14 months over the past three years in which stock markets, the S&P 500, has lost money. In all 14 of those months, the Agg Bond Index has also lost money. But in 13 of those 14 months, our Global Equity Market Neutral Fund has actually been up. So, certainly seeing the value for other diversifiers as part of your portfolio, and we’re certainly building those in as part of our, what would be a bond sleeve is now a diversifying sleeve with alternatives. 

Last piece I’ll leave you with is we’re really optimistic about private markets going forward. We think the return in premium could go up there. We’re seeing a lot of dry powder sitting on the sides, we’re seeing valuations that might not have yet adjusted the way public market equities have, and we’re certainly seeing lower financing costs, more demand for fundraising capital as well, making us really excited about that private market space. 

So, you put that all together into a diversified portfolio, we are at our max, almost at our max overweight to equities within our model portfolios. They can go up to 5%. They’re sitting at +4% right now. So, that gives you a sense of how bullish we are and how overweight, but still building in as complements all of those other exposures as well.

We’re going to be doing these In the Know Webinars on a monthly basis going forward. The next one is going to be on February 20th at 2:00 Eastern. So, really excited for that as well. Hopefully we’ll see you there, and if not, have a wonderful January, and we’ll talk again soon.

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ITK Recap: January 2025

In our latest In the Know webinar, we discussed our optimism around U.S. equities, the importance of diversification within bonds, and our optimism around private markets.

View our brief summary recap video and best implementation ideas below.

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Optimism in U.S. equities
Take an active approach to security selection with Alister Hibbert’s BlackRock Unconstrained Equity Fund (MAEGX)
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Diversify your bonds
Get active curve positioning and security selection with our Strategic Income Opportunities Fund (BSIIX)
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Scale with models
Our Target Allocation models can help translate market dynamics into portfolio ideas

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