Multi-Asset

2025 Year Ahead Investment Directions

highway
Jan 07, 2025|ByGargi Pal ChaudhuriKristy Akullian, CFA

KEY TAKEAWAYS

  1. We expect U.S. outperformance to continue amid solid economic growth, relatively easy financial conditions, and the potential for tax cuts and deregulatory policies.
  2. We continue to prefer large-cap, high quality U.S. equities and see tactical opportunities in financials. In fixed income, we prioritize income over price appreciation and prefer the front and belly of the yield curve to long duration exposures.
  3. Uncertainty associated with both trade and immigration policy could lead to slower growth, higher inflation – or both – over the course of 2025 and beyond. We favor alternative strategies and asset classes to hedge this risk in an environment where long term bonds have been an unreliable source of diversification.

INTRO

We take a pro-risk stance heading into 2025 but acknowledge that consensus positioning can increase the likelihood of near-term pullbacks. Even so, record amounts of cash held in money market funds suggest that such technical dips are prone to be bought. Indeed, across our investment platforms, BlackRock’s portfolio managers have taken an overweight position in U.S. equities. We anchor our medium-term directional expectations on fundamental macroeconomic data and their flow through to corporate earnings.

Figure 1: Even in a banner year for equities, investors set aside record allocations to cash

Bar chart depicting year-to-date ETF flows for non-U.S. equity, U.S. equity, bonds, and money markets.

Source: Goldman Sachs Global Investment Research, Daniel Chavez. Groupings determined by Goldman Sachs Global Investment Research. As of 12/4/2024.

Chart description: Bar chart depicting year-to-date flows for non-U.S. equity, U.S. equity, bonds, and money markets..

Solid U.S. growth, healthy consumer balance sheets, relatively easy financial conditions, and the possibility of deregulation and tax cuts underpin our positive view of risk assets. We continue to favor U.S. equities over the rest of the world, leaning into strong recent momentum, with a preference for quality in a highly uncertain global landscape. The flip side of solid U.S. growth and low unemployment, even with Fed funds above 4%, is that further large cuts are unlikely.1 Within fixed income, we favor income over duration and seek higher yields outside of core bond allocations – a view shared by many of our fixed income portfolio managers. 

But the uncertainty associated with both trade and immigration policy could lead to slower growth, higher inflation – or both. As a result, we pair our pro-risk stance with a set of targeted hedges to help counter these risks, cautioning that the antidote may need to be specific to the ailment. Stock/bond correlation in U.S. assets has become less reliably negative, so we see expanded scope for alternative diversifiers within a portfolio.2

AI is a mega force that could fundamentally reshape economies. And markets have been more sensitive to data surprises than in the past. As detailed by the BlackRock Investment Institute in the Global Outlook, this is an environment in which dynamism and granularity are both essential. We see it as motivating greater use of ETFs, active strategies and a broad range of diversifiers.

Figure 2: Financial conditions have eased even though rates remain high

Line chart of the effective Fed funds rate compared to financial conditions from 2022 to 2024.

Source: Bloomberg. Reference indexes are the U.S. Federal Funds Rate and the Goldman Sachs U.S. Financial Conditions Index. As of 12/12/2024.

Chart description: Line chart of the effective Fed funds rate compared to financial conditions from 2022 to 2024.

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Chief Investment and Portfolio Strategist Americas at BlackRock
Head of iShares Investment Strategy Americas at BlackRock

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