Taking stock
A year that opened with optimism for global equities was rattled by tariff announcements that sent markets into a tailspin.
Trade and tariff uncertainty that stoked early-year volatility was supercharged at the start of Q2 by far-reaching U.S. tariff pronouncements that set off a global market meltdown and reignited recession fears in the process.
Beyond tariffs, the second Trump presidency ushers in a broader new policy regime, with a range of yet untold macroeconomic and market implications. While tariffs are paramount today, the potential for market-supporting policies such as deregulation and corporate tax cuts leave room for emergent optimism.
Late January also brought news of DeepSeek, the small Chinese start-up that seemed to achieve AI model success on par with the major U.S. players at a fraction of the cost. Massive capex spending by the big-four U.S. hyperscalers was called into question on fears it was an overshoot with little potential for proportionate return on investment.
The market reeled in reaction, causing some to question if equities could power on without the propulsion of the AI trade. While concerns still linger, the hyperscalers not only reaffirmed but increased their capex spending intentions for 2025 and DeepSeek is now heralded as a catalyst to spur ever-faster progress in the race to artificial general intelligence (AGI).
What can we take away from this AI consternation? As we have said before, mega forces never move in a straight line. Even the savviest business minds have been taken by surprise during periods of disruption. Well-echoed comments across time had cast doubt on some of the most successful innovations, including desktop computers and smartphones.
Ultimately, Q1 market action reversed some of the more exceptional Q4 moves and continues to play out amid the tariff shocks. Still, we believe some of the corrections may be overdone, causing dislocations between fundamentals and current pricing ― and opening some interesting entry points and attractive prospects. Caution and selectivity are key.
The path forward will likely be paved with more volatility ― as well as dispersion across sectors, geographies and individual stocks. This points to the importance of an active approach to capitalize on inefficiencies and to make the most precise and intentional decisions in this time of historic change and transition.
No one can predict the results of countless bilateral tariff negotiations, but we believe having a pulse on company dynamics, especially when the macro picture is unclear, can be a differentiator for portfolios.
Fundamentals fuel U.S. equity optimism
After two consecutive calendar years in which the S&P 500 Index returned more than 20%1 ― a rare occurrence as we discussed in our Q1 outlook ― some question whether U.S. stock market leadership will be upended, particularly amid the prevailing unease.
Our take: U.S. equity dominance exists on a continuum in which perceptions can range from overinflated to underinflated. A strong rally in Q4 2024 and dramatic pullback year-to-date offer examples of each, with both driven largely by sentiment. But such moves, whether based on macro concerns like tariffs or the natural ebbs and flows of the AI mega force, are distinctly different from the fundamental foundations that we believe give U.S. equities an enduring secular advantage. We see this in three areas:
Supportive policy impulse
Corporate strength has long supported U.S. equity fortitude and comes through in earnings and market share. U.S. companies posted earnings growth of more than 18% year-over-year in Q4. This compared to 7%-8% in Europe.2 The total market cap of public companies in the U.S. ― $63 trillion at year-end 2024 ― represents more than half of global market value, according to Dow Jones Market Data. Europe, mainland China and Hong Kong together represent only 25%.
On balance, relatively pro-industry policies have long stimulated healthy free cash flow. Many companies across time have deployed that cash for future business growth. While policy uncertainty in this time of transition has some companies pausing large investment decisions, we believe potential moves toward deregulation and reshoring of supply chains once policy is settled could ignite capex spending across industries, including technology and industrials. Our data shows mentions of “deregulation” in Q4 earnings calls were up 20x in the three months relative to the average in the prior four years. Even as the word “tariffs” dominates today, we expect deregulation and other policy priorities to regain attention.
Compelling corporate quality
We find quality and efficiency to be important hallmarks of the companies that make up the public stock universe in the U.S. Commentators will often cite the prevalence of a large number of tech companies in the U.S. as the driver of U.S. equity dominance. But our analysis points to wider breadth in U.S. quality. Current return on tangible invested capital (ROTIC), a proxy for a company’s ability to allocate capital for optimal profitability, is significantly higher in the U.S. than elsewhere in the world, suggesting quality exists not in pockets but across sectors. See the chart below.
A thirst and thrust for innovation
A final long-term secular trend we see supporting U.S. equities: high drive for innovation. The U.S. is home to some of the largest and most innovative companies in the world. It is at the forefront of the AI infrastructure buildout, and a leader on the global stage in both R&D spending and patent applications. Intellectual property laws serve to stimulate this innovative impulse while offering federal protections for the fruits of those efforts. The U.S. has more than half the world’s “unicorn” companies, private start-ups valued at more than $1 billion.3
We believe any moves toward policy targeting deregulation could accelerate this innovative edge. At the same time, we are watchful of developments around antitrust enforcement as relates to big tech. Trade policy is more complex ― in both the ongoing machinations and the ultimate end game. We believe the U.S.’s position as the world’s largest net importer of goods could blunt the economic impact relative to some global peers, and we continue to monitor developments and potential implications at an individual company level. Notably, we looked at equity returns in times of elevated economic policy uncertainty and found that markets have historically outperformed in the ensuing 12 months relative to periods with more muted policy uncertainty.4 We are hopeful for history to repeat.
All of the above contributes to our positive long-run outlook for U.S. stocks. In the nearer term, we expect the market to continue to broaden out ― not only from “Magnificent 7” leadership to the rest of the U.S. but to other parts of the world as well. First-quarter results may be a teaser, with developed markets ex-U.S. leading returns, followed by emerging markets and then value stocks within the U.S.5 That final area is one where we see significant opportunity and one where many investors may be unintentionally underexposed as the major U.S. indexes have grown increasingly growth oriented in recent years.
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Past performance is not a reliable indicator of current or future results. Any opinions or forecasts represent an assessment of the market environment at a specific time and is not a guarantee of future results. This information should not be relied upon by the reader as research, investment advice or a recommendation.
1 Source Bloomberg.
2 Source: BlackRock Fundamental Equities with data from Refinitiv and FactSet, March 2025.
3 Source: Eqvista, “Complete list of unicorn companies,” January 2025.
4 Economic policy uncertainty is measured by the US. Economic Policy Index from 1985 to present. Elevated uncertainty is represented by an index reading above 200.
5 BlackRock Fundamental Equities, with data from Bloomberg as of March 31, 2025. Indexes used are MSCI World ex U.S., MSCI ACWI ex U.S. and Russell 1000 Value.
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