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Stocks are rallying on strong AI earnings expectations, offsetting jitters over inflation pressures from geographical fragmentation such as the Middle East supply shock. That could change in the near term, but we look beyond this in our strategic views when we see these mega forces – big, structural trends – in action. We upgrade developed market stocks to overweight and downgrade high yield to neutral as we shift where we take growth risk on a horizon of five years or more.
Markets are being pulled in different directions by competing mega forces. AI is driving stocks higher today, but we cannot say which force will dominate in the long run. That’s why our capital market assumptions (for professional investors only) are built on multiple scenarios that imply fundamentally different macro paths.
Our starting point (the green dot) reflects our latest thinking, and the gap between outcomes shows how mega forces could affect outcomes over a five-year period. In one, AI drives a productivity boom that could sustain stronger growth and earnings, justifying higher equity valuations over the strategic horizon, as the chart’s pink dot shows. In another, geopolitical fragmentation fuels stagflationary pressures that push global risk premia higher as investors demand greater compensation for uncertainty. This would lower equity valuations, as the purple dot shows
For now, AI-driven earnings momentum looks strong: Upgrades to MSCI U.S. 2026 and 2027 earnings expectations in the past two quarters rank in the top five since 1988. And it’s broadening: The gap between expected “magnificent seven” earnings growth and the rest of the S&P 500 in 2027 has narrowed to 3 percentage points, down from 31% in 2024.
Leadership is also broadening across regions and sectors, as AI reshapes markets beyond asset classes. The technology sector is a larger share of the MSCI EM Index than it is of the S&P 500, reflecting Taiwan’s and South Korea’s key role in the AI supply chain. All this underpins our DM equities upgrade and existing EM equities overweight on a long-term horizon.
We view these not as broad market exposures but through sectors and regions. In DM equities, we favor tech, AI-adopters such as health care and energy sectors tied to the AI buildout and rising power demand. We also favor EM tied to AI supply chains, including Taiwan and South Korea. We see India stocks benefiting from the demographic mega force: a growing workforce.
To fund the DM equities upgrade, we reduce our fixed income exposure in our strategic portfolios. Within this segment, we like high yield as it offers attractive income with less duration, or sensitivity to interest rate swings, than investment grade credit.
But we don’t build portfolios in asset class silos. Similar to a total portfolio approach, we prefer taking growth risk in equities, leading us to downgrade high yield to neutral. The reason: Investors can participate in equity upside rather than be capped by coupon income.
We also downgrade DM government bonds to underweight, leaving our long-term portfolios with less duration risk than our benchmark. We overweight inflation-linked bonds as we expect inflation to be more persistent than markets currently price over a strategic horizon of five years or more.
The clash of mega forces across asset classes this year reinforces the need for a dynamic, scenario-based approach to navigate uncertain outcomes. We see the industry increasingly recognizing this shift through greater focus on total portfolio approaches that cut through asset class labels.
A prime example is investing in infrastructure. We think infrastructure can do well under all our scenarios as it has historically been resilient in periods of market stress. Most investors can up their holdings materially, depending on their tolerance for illiquidity risk, or the risk of being unable to sell an investment quickly.
Bottom line: We upgrade DM equities on a strategic basis due to AI-driven earnings momentum strength. We downgrade high yield to neutral as we prefer to take growth risk in equities but still like it for income in a fixed-income context.
Jean Boivin is Managing Director, Head of the BlackRock Investment Institute at BlackRock Inc.
Wei Li, Global Chief Investment Strategist, Blackrock Investment Institute at BlackRock Inc., Vivek Paul Global Head of Portfolio Research – BlackRock Investment Institute, Devan Nathwani, Portfolio Strategist – BlackRock Investment Institute, Sally Du Co-Portfolio Manager – BlackRock Fundamental Equities, contributed to this article.
Disclaimer
Content copyright © 2026 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 May 18, 2026, 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.
Image: iStock.com/Darren415
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