2025 Midyear Investment Outlook

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2025 MIDYEAR INVESTMENT OUTLOOK

July 1, 2025 | Sharp U.S. policy shifts and elevated uncertainty reflect an evolution of the new macro regime. What matters: getting a grip on uncertainty by identifying its core features. Long-term macro anchors are weaker given the many different potential outcomes. Yet immutable economic laws prevent policy from revamping the world overnight.

Read our 2025 midyear outlook (PDF) Read our 2025 midyear outlook (PDF)

Investment themes

01

Investing in the here and now

Immutable economic laws limit how fast global trade and capital markets can evolve, providing more certainty about the near-term macro outlook than the long term. That keeps us pro risk and overweight U.S. equities.
02

Taking risk with no macro anchor

We believe this environment of transformation is better than the prior decade for achieving above-benchmark returns, or alpha. Yet the volatile macro environment injects risk into portfolios that needs to be actively managed or neutralized.
03

Finding anchors in mega forces

Even with the loss of long-term macro anchors, we believe mega forces are durable return drivers. Yet mega forces don’t map into broad return drivers, and we get granular to track their evolution across and within asset classes. We like the AI theme.

Read details of our 2025 midyear outlook:

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An evolving macro regime

Sharp U.S. policy shifts and elevated uncertainty make it seem the world is upended. What matters now for investors is getting a grip on this environment’s defining features. We have long argued that we entered a new macro regime marked by profound transformations, shaped by mega forces that could lead to many very different potential outcomes over time – for the trajectory and makeup of the global economy, inflation, government debt and deficits or global trade. 2025 has put this new regime into sharper relief, with serious discussion about the potential for fundamental changes to the structure of global markets.

Put another way, the loss of long-term macro anchors that have underpinned long-term asset allocation for decades is a defining feature of this new regime. But the global economy can’t be revamped overnight. Immutable economic laws – on global trade and debt financing – exist that policy cannot ignore in the near term. Attempts to break them are akin to trying to break laws of physics – and defy gravity – in our view.

Nobody knows where the macro environment is ultimately headed. But understanding these policy limits makes us more comfortable staying pro-risk on a tactical horizon.

Losing long-term macro anchors

Geopolitical fragmentation, AI and other mega forces are reshaping the trajectory and makeup of the global economy. This is not a cyclical adjustment but a structural one that can lead to many very different outcomes. Elevated uncertainty is a given. We start to get to grips with it by identifying a core feature of this environment: the loss of long-term macro anchors that markets have relied on for decades.

Inflation expectations are no longer firmly anchored near 2% targets. Fiscal discipline is ebbing away. The compensation investors want for holding long-term U.S. Treasuries is rising from suppressed levels. And confidence in institutional anchors – central bank independence and the haven role of U.S. assets – has been shaken.

We think that requires a new approach to risk taking. With long-run economic trajectories now ever-evolving, one would expect investors to search data for signals about where things are headed. This is exactly what we’ve seen. Equity returns have become more sensitive to short-term data as investors try to infer what it means about both the near and long term.

Questioning the future
Equity sensitivity to macro and trade uncertainty, 2004-2025

Source: BlackRock Investment Institute, June 2025. Note: Sensitivity represents the sum of the coefficients (absolute value) in the regression of weekly equity returns on the Citi Economic Surprise index, and Trade Policy Uncertainty index by Iacovello et al. (2020). All variables enter the regression as z-scores. Trade policy uncertainty index is available from 2015 at daily/weekly frequency and backfilled (assumed zero) in the previous years.

World can’t change quickly

Immutable economic laws on trade and debt are constraining U.S. policy shifts – and can help investors navigate near-term uncertainty. We believe we now have more certainty about the near-term macro outlook than the long – a big change from the past.

One law limiting trade policy: supply chains can’t be rewired quickly without major disruption. Companies can’t just source products and inputs from elsewhere overnight without a halt in activity. We believe that rule was behind the rapid tariff carve-outs — such as exemptions for electronics from China — and why the U.S. and China soon restarted trade talks.

The second law is on debt: U.S. debt sustainability relies on big, steady funding by foreign investors, who hold about a quarter of it. Any falloff in foreign demand for Treasuries could spike yields and make borrowing costs so high that it forces a policy response. We think the tariff pause soon after the April 2 announcement was likely partly due to the yield spike. We see a fragile equilibrium – elevated debt, sticky inflation and higher interest rates – making U.S. Treasuries vulnerable to investors seeing them as riskier.

Foreign funding needed
Ownership of U.S. Treasuries, 2000-2025

Source: BlackRock Investment Institute, U.S. Treasury, April 2025. Note: The chart shows foreign and domestic ownership of U.S. Treasury securities outstanding as a share of total U.S. Treasury securities outstanding.

View the outlook in charts (PDF) View the outlook in charts (PDF)

Investing in the here and now

We have more certainty about the near-term macro outlook than the long term – an unusual situation for investors. So, we put greater weight on tactical views. That’s why our first theme is investing in the here and now. That favors U.S. equities and themes such as artificial intelligence. We stand ready to pivot depending on the ultimate impact of U.S. policy on the economy. We don’t think Europe can outperform yet without structural changes, but some of the steps Europe has taken give us optimism.

Since 2000, European equities have had many periods of outperformance over U.S. equities – but they have become increasingly rare. Yet those rallies never spurred questions about the role of U.S. assets as we’ve seen this year. We think the current economic setup still supports U.S. outperformance. We see scope for overall corporate earnings to stay solid even if U.S. growth is dented by tariff-induced disruptions and corporate caution

Limited rebounds
Ratio of European vs. U.S. equity total returns, 2001-2025

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results. 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, July 2025. Note: The chart shows the ratio of total returns in local currency for the Stoxx 600 over the S&P 500, with shaded areas highlighting instances where the Stoxx 600 outperformed the S&P 500 by more than 5% over a three- to six-month period.

Taking risk with no macro anchor

We believe this environment of transformation is better than the prior decade for achieving above-benchmark returns, or alpha. Our work finds that top-performing portfolio managers have delivered more alpha since 2020. And the median manager is seeing a bigger drag on returns from static factor exposures. That underscores how the volatile macro environment injects risk into portfolios that needs to be actively managed. That’s why taking risk with no macro anchor is our second theme.

Greater potential alpha on offer
Three-year excess returns of U.S. equity fund managers, 2010-2025

Past performance is not a reliable indicator of future performance. This information should not be relied upon by the reader as research or investment advice regarding any funds, strategy or security. Source: BlackRock Investment Institute, with data from eVestment and LSEG Datastream, July 2025. Notes: The chart compares the rolling three-year average excess return (into alpha and factor contribution) between 2010-2019 and 2020-2025 – excluding January-June 2020 for both top-quartile and median quartile U.S. large cap equity managers in the eVestment universe. We use regression analysis to estimate the relationship between alpha-seeking manager performance and market conditions. Regression analysis is backwards-looking and is only an estimate of the relationship. The future relationship may differ.

Finding anchors in mega forces

Even with the loss of long-term macro anchors, we believe mega forces are durable drivers of returns – and are finding anchors in mega forces, our third theme. Capital spending and infrastructure is at the heart of many mega forces. But big capital spending does not necessarily result in big returns, as we have seen with the energy transition and security theme. Instead, we need to track their evolution across and within asset classes, get granular with themes and constantly adapt to what’s priced in.

Tracking the investment waves
Energy and AI-related capital spending, 2022-2030

Forward-looking estimates may not come to pass. Source: BlackRock Investment Institute, Reuters and Aladdin Sustainability Analytics, with IEA data, April 2025. Note: The bars show the estimated breakdown of capital investment needs – both from supply and demand-based estimates. 2022 data is from the IEA. BlackRock estimates start in 2025.

Leaning on themes

We had previously laid out scenarios to help guide us on a tactical investing horizon. Yet we think macro outcomes are likely more contained in the near term than in the long term. For that reason, we are now using scenarios to guide how we speak to a medium-term outlook in strategic allocations of five years and beyond. Mega forces are a key driver of asset allocation across tactical and strategic horizons – and highlight how the opportunity set is becoming more thematic in nature.

Big calls

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

	Reasons
Tactical
U.S. equities	Policy uncertainty and supply disruptions are weighing on near-term growth, raising the risk of a contraction. Yet we think U.S. equities will regain global leadership as the AI theme keeps providing near-term earnings support and could drive productivity in the long term.
Using FX to enhance income	FX hedging is now a source of income, especially when hedging euro area bonds back into U.S. dollars. For example, 10-year government bonds in France or Spain offer more income when currency hedged than U.S. investment grade credit, with yields above 5%.
Seeking alpha sources	We identify sources of risk taking to be more deliberate in earning alpha. These include the potential impact of regulatory changes on corporate earnings, spotting crowded positions where markets could snap back and opportunities to provide liquidity during periods of stress.
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-term inflation-linked bonds over nominal developed market (DM) government bonds, as U.S. tariffs could push up inflation. Within DM government bonds, we favor UK gilts over other regions.
Equity granularity	We favor emerging over developed markets yet get selective in both. Emerging markets (EM) at the cross current of mega forces – like India – 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, July 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, July 2025

The table below reflects our views on a tactical horizon and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at times of heightened volatility.

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Asset		Tactical view	Commentary
Equities
United States			We are overweight. Policy-driven volatility and supply-side constraints are pressuring growth, but we see AI supporting corporate earnings. U.S. valuations are backed by stronger earnings and profitability relative to other developed markets.
Europe			We are neutral. Greater unity and a pro-growth agenda across Europe could boost activity, yet we are watching how the bloc tackles its structural challenges before turning more optimistic. We note selective opportunities in financials and industries tied to defense and infrastructure spending.
UK			We are neutral. Political stability could improve investor sentiment. Yet an increase in the corporate tax burden could hurt profit margins near term.
Japan			We are overweight given the return of inflation and shareholder-friendly corporate reforms. We prefer unhedged exposures as the yen has tended to strengthen during bouts of market stress.
Emerging markets (EM)			We are neutral. Valuations and domestic policy are supportive. Yet geopolitical tensions and concerns about global growth keep us sidelined for now.
China			We are neutral. Trade policy uncertainty keeps us cautious, and policy stimulus is still limited. We still see structural challenges to China’s growth, including an aging population.
Fixed income
Short U.S. Treasuries			We are overweight. We view short-term Treasuries as akin to cash in our tactical views. We would still lean against the market pricing of multiple Fed rate cuts over the next year.
Long U.S. Treasuries			We are underweight. Persistent budget deficits and inflation pressures could drive term premium up over the long term, but we see scope for lower yields near term. We prefer intermediate maturities.
Global inflation-linked bonds			We are neutral. We see higher medium-term inflation, but cooling inflation and growth may matter more near term.
Euro area government bonds			We are neutral. Yields are attractive, and term premium has risen closer to our expectations relative to U.S. Treasuries. We prefer peripheral bonds such as in Italy and Spain.
UK gilts			We are neutral. Gilt yields are off their highs, but the risk of higher U.S. yields having a knock-on impact and reducing the UK’s fiscal space has risen. We are monitoring the UK fiscal situation.
Japanese government bonds			We are underweight. We see room for yields to rise further on Bank of Japan rate hikes and a higher global term premium
China government bonds			We are neutral. Bonds are supported by looser policy. Yet we find yields more attractive in short-term DM paper.
U.S. agency MBS			We are overweight. We find income in agency MBS compelling and prefer them to U.S. Treasuries for high-quality fixed income exposure.
Short-term IG credit			We are overweight. Short-term bonds better compensate for interest rate risk.
Long-term IG credit			We are underweight. Spreads are tight, so we prefer taking risk in equities. We favor Europe over the U.S.
Global high yield			We are neutral. Spreads are tight, but corporate fundamentals are solid and it provides attractive income.
Asia credit			We are neutral. We don’t find valuations compelling enough to turn more positive.
Emerging hard currency			We are underweight. Spreads to U.S. Treasuries are near historical averages. Trade uncertainty has eased, but we find local currency EM debt more attractive.
Emerging local currency			We are neutral. Debt levels for many EMs have improved, and currencies have held up against trade uncertainty. We prefer countries with higher real interest rates.

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, July 2025

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Asset	Tactical view	Commentary
Equities
Europe ex UK		We are neutral. Greater unity and a pro-growth agenda across Europe could boost activity, yet we are watching how the bloc tackles its structural challenges before turning more optimistic. We note opportunities in financials and industries tied to defense and infrastructure spending.
Germany		We are neutral. Valuations and earnings growth are supportive relative to peers, especially as ECB rate cuts ease financing conditions. Prolonged uncertainty about potential tariffs and fading euphoria over China’s stimulus could dent sentiment.
France		We are neutral. 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		We are neutral. Valuations are supportive relative to peers. Yet 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		We are overweight. Valuations and earnings growth are supportive compared to other euro area stocks. Financials, utilities and infrastructure stocks stand to gain from a strong economic backdrop and advancements in AI.
Netherlands		We are neutral. 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		We are neutral, 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		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		We are neutral. Yields are attractive, and term premium has risen closer to our expectations relative to U.S. Treasuries. We prefer peripheral bonds such as in Italy and Spain.
German bunds		We are underweight. Market pricing aligns with our policy rate expectations, but growth support fiscal stimulus is likely to push up neutral rates. More balanced inflation risks and bond issuance could push term premium up.
French OATs		We are underweight. France continues to face challenges from elevated political uncertainty, persistent budget deficits and a slower pace of structural reforms.
Italian BTPs		We are neutral. The spread over German bunds looks tight given its large budget deficits and growing public debt. 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. Given the domestic political pushback, we do not think Italy will boost defense spending to such an extent that fiscal stability concerns resurface.
UK gilts		We are neutral. Gilt yields are off their highs, but the risk of higher U.S. yields having a knock-on impact and reducing the UK’s fiscal space has risen. We are monitoring the UK fiscal situation.
Swiss government bonds		We are neutral. Markets are expecting policy rates to return to negative territory, which we deem as unlikely.
European inflation-linked bonds		We are neutral. We see higher medium-term inflation, but inflation expectations are firmly anchored. Cooling inflation and uncertain growth may matter more near term.
European investment grade credit		We are neutral on European investment grade credit, favoring short- to medium-term paper for quality income. We prefer European investment grade over the U.S., as quality-adjusted spreads are relatively wider.
European high yield		We are overweight. The income potential is attractive, and we prefer European high yield for its more appealing valuations, higher quality and less sensitivity to interest rate swings compared with the U.S. Spreads adequately compensate for the risk of a potential rise in defaults, in our view.

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, July 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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