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Corporate earnings beats have set the tone for the fourth-quarter season in swing. Even with higher-for-longer interest rates, we think U.S. stocks can keep outperforming this year. We stay overweight. Resilient economic growth is helping sectors beyond tech. That’s partly driven by artificial intelligence (AI) spurring earnings beyond the initial winners during an economic transformation and policy change, we think. Yet we eye risks to risk appetite changing this year depending on earnings and policy.
The surge in long-term bond yields highlighted how markets have embraced our view that interest rates will stay above pre-pandemic levels. Even as markets have priced out some rate cuts, strong corporate earnings growth has pushed U.S. stocks higher. The “Magnificent Seven” of mostly mega-cap tech companies have driven earnings growth in recent years. Yet policy shifts, a low earnings base for the rest of the market, and more non-tech contributors to the AI buildout over time could spur strength to broaden. Analyst forecasts reflect that: The gap between Magnificent Seven earnings and those for the rest of the market is expected to shrink in 2025 (see the chart below).
Yet our U.S. equity overweight is not contingent on broadening. We see concentration in mega-cap tech as a feature of the economic transformation driven by mega forces like AI – a reason we still like the Magnificent Seven.
Companies are beating expectations so far, with overall S&P 500 earnings expected to grow roughly 11% for Q4 2024, LSEG Datastream data show. Analysts see earnings jumping 14% this year. That number may tick down as typically happens in most years as early optimism fades, but all sectors – even the struggling energy, materials, and healthcare sectors – are expected to see growth. That’s powered by resilient economic growth as consumer spending has held up.
Looking ahead, we’re tracking how U.S. policy could affect different sectors and potentially cause earnings strength to broaden further. The financial sector could get a boost from expected deregulation if it spurs more corporate dealmaking.
President Donald Trump’s executive orders also aim to ramp up energy production, including making it easier to gain permits for building energy infrastructure. Policy changes could bolster sticky inflation, reinforcing our view of higher-for-longer rates and potentially driving the dollar toward its 2022 peaks. That would put pressure on profit margins for big U.S. exporters.
Even as earnings strength broadens, we still favor the AI theme. A pledge by big tech companies to spend billions of dollars building data centers highlights the ongoing buildout. We think big tech can keep delivering on earnings, but misses could revive concerns that big capital spending on AI won’t pay off – one of three triggers to dial down our pro-risk view. Metrics like capex-to-sales ratios and free cash flows suggest that, for now, mega cap tech firms are not overextended. Overinvestment should be assessed in aggregate, in our view, given AI’s potential to unlock new revenue streams across the economy.
Earnings are broadening in Europe, but more slowly. They’re forecast to grow 2% in Q4 and 8% for 2025. We still prefer U.S. stocks over Europe’s. Political strains in the region, potential U.S. tariffs, and a weak Chinese economy remain risks. Yet weak investor sentiment sets a low bar for positive surprises to lift the market. We like quality companies with strong free cash flow and global operations better shielded from tariffs. Industrial and semiconductor companies benefit from structural shifts.
Earnings growth has helped U.S. stocks climb even with higher interest rates. We think U.S. stocks can keep outperforming as earnings strength broadens beyond tech. We stay overweight U.S. stocks in our six- to 12-month views.
Jean Boivin is Managing Director, Head of the BlackRock Investment Institute at BlackRock Inc.
Wei Li is Global Chief Investment Strategist, Blackrock Investment Institute at BlackRock Inc.
Helen Jewell, Chief Investment Officer EMEA, Fundamental Equities – BlackRock, and Carolina Martinez Arevalo, Portfolio Strategist – BlackRock Investment Institute, contributed to this article.
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© 2025 BlackRock Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. This article first appeared Jan. 27, 2025, on the BlackRock website. Used with permission.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.
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