Multi-Asset

3 things we’re watching entering 2025

image of different colored vespas
Jan 06, 2025|ByTom Becker

2024 was a year that brought the world together for the summer Olympics in Paris and divided America with a Yankees-Dodgers World Series match-up. Dispersion across countries rose throughout the year, particularly as the market priced in the policy shifts anticipated under a Trump presidency. As we shift our focus to the market opportunities in early 2025, we also reflect on three macro developments that drove markets over the past year.

Some 2024 highlights

Still no US landing - The Federal Reserve’s late 2023 dovish pivot foamed the runway, but US consumers, businesses, and inflation had no interest in landing the plane.

• Loose financial conditions - The Fed slowed the pace of QT in the spring and delivered a jumbo first cut in the fall and the S&P 500 responded with a 25% return on approximately 11% risk over the year.1

Inflation-weary voters - In a year of global elections, results across countries pointed to widespread dissatisfaction with incumbents.2

Looking ahead

As we look to 2025, we expect the prevailing market regime of elevated country dispersion and macro volatility to persist. Diversification in traditional multi-asset portfolios remains challenging as directional stocks and bonds face headwinds, but we see an improving opportunity set in long-short country exposures. Three key insights driving portfolio positioning are:

1. Fiscal-monetary tensions

There is a growing disconnect between the profligacy of the US fiscal policy outlook and the easing stance of US monetary policy. The new Treasury secretary, Scott Bessent, will need to issue historically large amounts of debt to fund the extension of the 2017 Tax Cuts and Jobs Act (TCJA); Trump’s proposed set of fiscal policies will challenge the long-term sustainability of US debt. Simultaneously the Federal Reserve will need to incorporate expansionary fiscal policies and inflationary tariffs into its monetary policy stance; a stance that already appears increasingly less likely to bring inflation back to its 2% target.3

In light of the tension of maintaining expansionary fiscal and monetary policy at this economic juncture, we have reduced directional long equity exposures and added to short 30-year Treasury positions in the BlackRock Tactical Opportunities Fund.

Further loosening of both fiscal and monetary policy may challenge the 2% CPI target

chart showing fiscal and monetary policy impact since 1989.

Source: BlackRock, Bloomberg, Federal Reserve Summary of Economic Projections as of December 2024, Congressional Budget Office (CBO).

2. Transatlantic divergence

There is a growing divergence in growth and inflation data between the US and Europe that is likely to be exacerbated by government policy changes in 2025. The US economy has remained exceptional with resilient growth, sticky inflation, and rising domestic investment. In contrast, Europe has struggled with weak productivity growth, hesitant consumers, and a lack of domestic investment. We see forthcoming tariffs from the Trump Administration as likely to exacerbate this economic divide, particularly given the rising political instability in Germany and France. 

We are positioned short US Treasury bonds and long European government bonds as issuance and inflation risks remain underpriced in US debt markets. This position contributed strongly to performance in the second half of 2024 and we think it has further room to run.

Transatlantic divergence in fiscal policy is wide – and getting wider

chart showing treasury supply in 10-yr equivalents net of central bank purchases as % of GDP since 2005 with 2025 US estimate.

Source: BlackRock with data from US Treasury, Federal Reserve, CBO, the EU, the ESM, the ECB, and the finance ministries of Germany, France, and Italy. As of September 2024.

3. Exuberant US equities

While the US growth outlook remains strong, lots of positive sentiment is already in the price for US equities. Current market pricing will make it challenging for US Q4 2024 earnings to exceed lofty expectations when they are released starting in mid-January, particularly with uncertain policy priorities under the new administration. Flows data in the chart below indicate that investors have been aggressively adding to US exposures relative to non-US markets, particularly in Q4. This crowding and consensus overweight, taken together with a high level of uncertainty over the earnings impact of Trump policy proposals, have led us to position in a contrarian manner.

In the aftermath of the US election, we have been steadily selling down US equities both directionally and in the global cross-section. We enter 2025 short the S&P 500 versus a diversified set of non-US equity markets.

Equity flows crowded into US equities and out of non-US markets in late 2024

chart showing exchange traded product (ETP) flows for US and non-US since 2022.

Source: BlackRock and Markit, as of December 17 2024.

Final thoughts

Many recent conversations with clients have touched on the challenge of finding diversification in today’s market landscape. Correlations across asset classes have risen and portfolio outcomes have become historically reliant on US asset returns. As global, multi-asset investors, we position long and short across a universe of 25+ countries’ stock and government bond markets to deliver diversifying returns. Within the BlackRock Tactical Opportunities Fund, we don’t root for any one asset class or region, and our active, tactical approach allows us to capitalize on dislocations between macro and market pricing to generate alpha. Good luck in 2025!

1BlackRock with data from Bloomberg. Return is total return from January 1, 2024 – December 31, 2024. Risk is represented by annualized standard deviation based on monthly returns over the same calendar year period.
2Incumbent parties lost in the US, UK, and South Korea and suffered surprising setbacks in South Africa, Japan, India, and France. Concerns about the economy were a common thread in the wake of three years of high inflation. Source: Pew Research, Economic ratings across 34 countries are more negative than positive.
3We discussed the entanglement of fiscal and monetary policy in a 2023 insight piece, where we highlighted the challenging tradeoffs in an era of challenging debt sustainability.

Performance data quoted represents past performance and is no guarantee of future results. Investment returns and principal values may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. All returns assume reinvestment of dividends and capital gains. Current performance may be lower or higher than that shown. Refer to blackrock.com for most recent month-end performance.

To obtain more information on the funds, including the Morningstar time period ratings and standardized average annual total returns as of the most recent calendar quarter and current month-end, please visit Tactical Opportunities Fund.

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 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 (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 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.

Subscribe for the latest market insights and trends

Get the latest on markets from BlackRock thought leaders including our models strategist, delivered weekly.
Please try again
First Name *
Last Name *
Email Address *
Country *
Thank you
Thank you
Thank you for your subscription
Tom Becker
Portfolio Manager, Global Tactical Asset Allocation Team

Access exclusive tools and content

Obtain exclusive insights, CE courses, events, model allocations and portfolio analytics powered by Aladdin® technology.

Get access now