BlackRock has upgraded developed market stocks to overweight, citing AI-driven earnings momentum as the basis for a strategic reallocation of growth risk.
The fund house has also downgraded global high yield to neutral and developed-market government bonds to underweight, while upgrading inflation-linked bonds to overweight.
Jean Boivin, head of the BlackRock Investment Institute, said: "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."
BlackRock cited earnings upgrades as the core driver, as analysts’ upgrades to their 2026 and 2027 earnings forecasts for the MSCI US index over the past two quarters are in the top five since 1988. It attributed this to "AI-driven earnings momentum".
AI earnings growth is also broadening beyond the largest technology companies, with the gap between expected earnings growth from the Magnificent Seven and the rest of the S&P 500 narrowing to 3 percentage points in 2027, down from 31 percentage points in 2024.
"Markets are being pulled in different directions by competing mega forces," Boivin said. "AI is driving stocks higher today, but we cannot say which force will dominate in the long run."
BlackRock is currently focused on five 'mega forces': digital disruption and artificial intelligence; demographic divergence; geopolitical fragmentation and economic competition; the future of finance; and the transition to a low-carbon economy.
The firm's capital-market assumptions are built on multiple macro scenarios. In one, AI drives a productivity boom that sustains stronger growth and earnings, justifying higher equity valuations. In another, geopolitical fragmentation fuels stagflationary pressures, pushing global risk premia higher and lowering equity valuations.
"The clash of mega forces across asset classes this year reinforces the need for a dynamic, scenario-based approach to navigate uncertain outcomes," Boivin added.
Within developed market equities, BlackRock favours technology, healthcare and energy sectors, linking the latter two to AI adoption and infrastructure buildout, including rising power demand.
It also maintains an overweight on emerging market equities, favouring Taiwan and South Korea for their roles in the AI supply chain and India on the basis of demographic growth.
On fixed income, it still views high yield favourably for income but prefers taking growth risk through equities, where investors can participate in upside rather than be capped by coupon income. The asset manager expects inflation to remain more persistent than markets currently price over its strategic horizon, underpinning its overweight on inflation-linked bonds.