What could change our pro-risk view?

Watching for three signs of deteriorating conditions

We upped our U.S. equities overweight in December as we expected AI beneficiaries to broaden beyond tech given resilient growth and Fed rate cuts. We think U.S. equity gains could roll on. Yet an economic transformation and global policy shifts could push markets and economies into a new scenario from our 2025 Outlook.

We look through near-term noise but outline triggers for adjusting our views, by either dialing down risk or shifting our preferences. First, we’re tracking the impacts of global policy – especially U.S. trade, fiscal, and regulatory policy. Second, we gauge whether risk appetite will stay upbeat as earnings results for AI beneficiaries come in and given high tech valuations. Third, vulnerabilities like a sudden jump in bond yields could also shift our view. The unusual yield jump since the Fed started cutting rates underscores this is a very different environment. See the chart below.

The first trigger to change our view is whether or not President-elect Donald Trump takes a market-friendly approach to achieve goals like improving growth and reducing budget deficits. In a market-friendly approach, rolling back financial regulation and cutting government spending could boost economic growth and risk assets. That, plus efforts to rebalance global trade and expand fiscal stimulus in countries where investment and consumer spending have lagged the U.S., may help address trade deficit worries.

In a less market-friendly approach, plans to extend tax cuts alongside large-scale tariffs could deepen deficits and stoke inflation. More broad-based tariffs could strengthen the U.S. dollar, fuel inflation, and call for high-for-longer interest rates. This plan would clash with Trump’s calls for a weaker dollar to boost U.S. manufacturing and his push for rate cuts. We look through noisy headlines around policy and focus on how policy changes take shape this year.

Sentiment and financial cracks

The second trigger: deteriorating investor sentiment due to earnings misses or lofty tech valuations. The “magnificent seven” of mostly tech companies are still expected to drive earnings this year as they lead the AI buildout. Their lead should narrow as resilient consumer spending and potential deregulation support earnings beyond tech. While earnings might surprise to the upside, any misses could renew investor concern over whether big AI capital spending will pay off and if high valuations are justified – even if we think valuations can’t be viewed through a historical lens as an economic transformation unfolds.

In our third trigger, we’re watching for elevated vulnerabilities in financial markets – including an already jittery bond market. We expect bond yields to climb further as investors demand more term premium for the risk of holding bonds. Term premium is rising from negative levels and is at its highest in a decade, LSEG Datastream data show.

The surge in UK gilt yields shows how concerns about fiscal policy can drive term premium – and bond yields – higher. The refinancing of corporate debt at higher interest rates is another risk. It could challenge the business models of companies that assumed interest rates would remain low. But many companies have refinanced debt without defaulting since the pandemic given strong balance sheets.

Our bottom line

We see U.S. equity gains cooling from their highs this year but staying strong, while U.S. Treasury yields climb. We stay overweight U.S. stocks and underweight long-term Treasuries, yet we’re watching triggers to change our 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.

Glenn Purves, Global Head of Macro Research – BlackRock Investment Institute, and Bruno Rovelli, Chief Investment Strategist for Italy – BlackRock Investment Institute, contributed to this article.

Disclaimer

© 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. 6, 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.

Image: iStock.com/Claudio Rossetto