Leaning against narrative shifts
2024 reinforced this is an economic transformation, not a business cycle. We lean against market moves driven by other interpretations and expect volatility.
Market backdrop
U.S. stocks surged more than 20% in 2024, driven by major tech stocks. U.S. Treasury yields ended the year above 4.50% as markets priced out Fed rate cuts.
Week ahead
We get U.S. payrolls for December this week. Market expectations of only two Federal Reserve cuts in 2025 seem reasonable given sticky inflation, we think.
We enter 2025 against an unusual macro backdrop. In 2024, time-tested recession indicators failed, inflation fell even as growth stayed above the historical trend and the Federal Reserve cut rates by 100 basis points even though financial conditions were already easy. Incoming data that didn’t fit with a business cycle led to outsized market responses and abrupt shifts in narratives. This heightened market volatility creates plentiful investment opportunities, we think. Take fixed income. Fed rate cut expectations went on a historic round trip last year. See the chart. The Fed itself pivoted from talk of an easing cycle a year ago to a mere recalibration now. By year end, markets had come around to our higher-for-longer rate view. We expected inflation to cool some – as it did. Yet we long believed that sticky inflation would prevent sharp Fed rate cuts and leaned against market pricing for most of the year.
2024’s round trip in rate cut pricing shows this is not a business cycle but a transformation – our first lesson. We see mega forces, or structural shifts, reshaping economies and markets. This transformation could keep shifting the long-term activity trend, making a wide range of outcomes possible. Last year, we focused on key stock drivers: strengthening corporate earnings and free cash flow growth. This led us to stick with companies delivering on earnings even when valuation concerns flared up. We stay risk-on as we think U.S. corporate strength is the scenario most likely to play out next year. Yet we eye signposts, including greater trade protectionism, to change our view if other scenarios appear more likely. Structural changes mean rethinking long-held investment principles – like the assumption growth will eventually revert to its historical trend.
Leaning against a cyclical view
We lean against markets interpreting data through a business cycle lens, our second lesson. Such an interpretation last year spurred recession fears and brief stock selloffs. That played out in December, too, with the sharpest stock slide in decades to follow a Fed cut during a bull market, our analysis shows. Our U.S. equity overweight isn’t shaken by the Fed’s signal of fewer rate cuts – we had expected that. Our overweight is grounded in the artificial intelligence (AI) theme, robust economic growth and broadening earnings growth. Soaring tech valuations and the concentration of returns in just a few tech companies caused some market jitters. Yet we see market concentration as a feature, not a flaw, of transformation.
Transformation can happen quickly. That is why our third lesson is to expect more volatility and surprises than usual as transformation widens the range of market outcomes in real time. A year ago, the word “hyperscalers” – or large tech firms investing billions in AI – had barely entered the public lexicon. Public policy is another area we expect to see swift change. We think policymaking could itself become a source of disruption and surprises – in an already more fragile world given heightened strategic competition between the U.S. and China. Trade protectionism is shaping up to be a key risk in 2025.
Our bottom line
We carry 2024’s lessons into 2025. We got clear evidence this is a transformation, not a business cycle. And we found it helps to lean against markets adopting a business cycle lens, eyeing more surprises as the transformation unfolds.
Market backdrop
U.S. stocks surged more than 20% over the course of 2024. Mega cap tech names led the way on the AI theme – even as stocks finished the year on a down note overall after the Fed signaled a slower pace of cuts ahead at its December meeting. Markets have brought up their year-end 2025 rate expectations to nearly 4%, in line with our higher-for-longer view. U.S. 10-year Treasury yields swung in a range of nearly 100 basis points during the year, closing out 2024 near 4.58%.
We get U.S. payrolls for December this week. Wage growth remains elevated due to an unexpected rise in immigration, in our view. While wage pressures have cooled some as immigration has slowed, they remain above the level that would allow inflation to fall to the Fed’s 2% target. Given the risk of resurging inflation from potential trade tariffs and the immigration slowdown continuing, market expectations of only two more Fed policy rate cuts in 2025 now seem reasonable, we think.
Granular views
Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, January 2025
Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. The new regime is not conducive to static exposures to broad asset classes, in our view, but is creating more space for alpha.
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.
BlackRock Investment Institute
The BlackRock Investment Institute (BII) leverages the firm’s expertise and generates proprietary research to provide insights on macroeconomics, sustainable investing, geopolitics and portfolio construction to help BlackRock’s portfolio managers and clients navigate financial markets. BII offers strategic and tactical market views, publications and digital tools that are underpinned by proprietary research.
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