2025 Q4 Investment Outlook | BlackRock Investment Institute

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2025 Q4 INVESTMENT OUTLOOK

September 18, 2025 | Today’s ongoing transformation makes long-term outcomes for inflation and growth uncertain. Instead of relying on traditional macro anchors, we tap into the mega forces driving returns today – from artificial intelligence to geopolitical fragmentation.

Read our Q4 update (PDF) Read our Q4 update (PDF)

Investment themes

01

Investing in the here and now

Immutable economic laws limit how fast global trade and capital markets can evolve, providing more certainty about the near-term macro outlook than the long term. That keeps us pro risk and overweight U.S. equities.
02

Taking risk with no macro anchor

We believe this environment of transformation is better than the prior decade for achieving above-benchmark returns, or alpha. Yet the volatile macro environment injects risk into portfolios that needs to be actively managed or neutralized.
03

Finding anchors in mega forces

Even with the loss of long-term macro anchors, we believe mega forces are durable return drivers. Yet mega forces don’t map into broad return drivers, and we get granular to track their evolution across and within asset classes. We like the AI theme.

Read details of our outlook for Q4:

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Staying pro-risk into Q4

We stay risk-on as we head into Q4. A softening labor market gives the Federal Reserve room to cut, in our view, helping ease brewing political tensions form higher interest rates. We think rate cuts amid a notable slowing of activity without recession should support U.S. stocks and AI theme.

We turn neutral long-term U.S. bonds: yields could fall further near term even if the structural pressures driving them up, including loose fiscal policy globally, persist.

Fiscal concerns return to the fore

Geopolitical fragmentation, AI and other mega forces are reshaping the trajectory and makeup of the global economy. This is not a cyclical adjustment but a structural one that can lead to many very different outcomes. Elevated uncertainty is a given. We start to get to grips with it by identifying a core feature of this environment: the loss of long-term macro anchors that markets have relied on for decades.

Inflation expectations are no longer firmly anchored near 2% targets. Fiscal discipline is ebbing away. The compensation investors want for holding long-term government bonds is rising from suppressed levels. And that’s put long-term bond yields under renewed pressure as fiscal concerns have become a bigger market driver.

Back in April, it was tariffs and heightened uncertainty driving markets. But now focus has turned to elevated debt across developed economies. Large debt loads are sharpening the acute tension between central banks keeping interest rates high to fight inflation and the impact those high rates have on the cost of servicing debt.

Case in point: 30-year bond yields in Japan, France and the UK have surged to multi-decade highs.

Rising borrowing costs
Thirty-year government bond yields, 2000-2025

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results. Source: BlackRock Investment Institute, with data from LSEG Datastream, September 2025. Note: The lines show the 30-year government bond yields for the UK, U.S., France and Japan.

New reasons to stay risk-on

Earlier this year, we argued that immutable economic laws on trade and debt would constrain U.S. policy shifts – and help investors navigate near-term uncertainty.

Relying on those immutable economic laws to look through April’s volatility worked well. Stocks across the world rebounded after April’s tariff-driven plunge as those immutable laws reined in a maximal stance on tariffs and policy, paving the way for a sharp rebound.

Equities bounce back
Regional equity performance, 2025

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index. Capital at risk. Source: BlackRock Investment Institute, MSCI, with data from LSEG Datastream, September 2025. Note: The chart shows different components of total returns for various regional indexes in local currency – except for emerging markets. Indexes used: MSCI China, MSCI EM $, MSCI UK, MSCI EMU, MSCI Japan and MSCI USA.

We still stay risk-on but for new reasons. We think a softening in the labor market will keep cooling services inflation. That allows the Federal Reserve to resume trimming policy rates this year without stoking fears about independence or fiscal dominance.

This should also relieve some of the upward pressure on long-term bond yields, so we turn neutral on a tactical horizon.

Investing in the here and now

We have more certainty about the near-term macro outlook than the long term – an unusual situation for investors. So, we put greater weight on tactical views. That’s why our first theme is investing in the here and now. That favors U.S. equities and themes such as artificial intelligence.

Resilient investment from companies into artificial intelligence (AI)-related infrastructure is propping up activity. That underlines how mega forces are the new anchor for today’s economy – and how they’re driving returns now.

An AI-powered economy
Annual change in U.S. non-residential investment, 2020-2025

Source: BlackRock Investment Institute, U.S. Bureau of Economic Analysis, with data from Haver Analytics, September 2025. Note: The bars show the contribution of non-residential investment to annual U.S. GDP growth, broken down into AI-related (software and AI processing equipment investment) and other sectors. The bar for 2025 shows the contribution through the first half of 2025.

Taking risk with no macro anchor

We believe this environment of transformation is better than the prior decade for achieving above-benchmark returns, or alpha. Our work finds that top-performing portfolio managers have delivered more alpha since 2020. And the median manager is seeing a bigger drag on returns from static factor exposures. That underscores how the volatile macro environment injects risk into portfolios that needs to be actively managed. That’s why taking risk with no macro anchor is our second theme.

Greater potential alpha on offer
Three-year excess returns of U.S. equity fund managers, 2010-2025

Past performance is not a reliable indicator of future performance. This information should not be relied upon by the reader as research or investment advice regarding any funds, strategy or security. Source: BlackRock Investment Institute, with data from eVestments and LSEG Datastream, July 2025. Notes: The chart compares the rolling three-year average excess return (into alpha and factor contribution) between 2010-2019 and 2020-2025 – excluding January-June 2020 for both top-quartile and median quartile U.S. large cap equity managers. We use regression analysis to estimate the relationship between alpha-seeking manager performance and market conditions. Regression analysis is backwards-looking and is only an estimate of the relationship. The future relationship may differ.

Finding anchors in mega forces

Even with the loss of long-term macro anchors, we believe mega forces are durable drivers of returns – and are finding anchors in mega forces, our third theme. Capital spending and infrastructure is at the heart of many mega forces. But big capital spending does not necessarily result in big returns, as we have seen with the energy transition and security theme. Instead, we need to track their evolution across and within asset classes, get granular with themes and constantly adapt to what’s priced in.

AI-linked sectors and companies have delivered on earnings, driving their U.S. equity gains year to date. Returns beyond the U.S. have mostly been driven by rising valuations.

AI-powered earnings strength
U.S. equity performance, 2025

The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index. Capital at risk. Source: BlackRock Investment Institute, MSCI, with data from LSEG Datastream and Bloomberg, September 2025. Note: The chart shows different components of total returns for various U.S. indexes. Index proxies used: A combination of the S&P 500 IT and S&P 500 Communication indexes for Technology and communications, the S&P 500 excluding the “magnificent seven” stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla), the S&P 500, S&P 500 equal-weighted and Russell 2000.

Leaning on themes

We had previously laid out scenarios to help guide us on a tactical investing horizon. Yet we think macro outcomes are likely more contained in the near term than in the long term. For that reason, we are now using scenarios to guide how we speak to a medium-term outlook in strategic allocations of five years and beyond. Mega forces are a key driver of asset allocation across tactical and strategic horizons – and highlight how the opportunity set is becoming more thematic in nature.

Big calls

Our highest conviction views on six- to 12-month (tactical) and over five-year (strategic) horizons, September 2025

	Reasons
Tactical
U.S. equities	Policy uncertainty and supply disruptions are weighing on near-term growth, raising the risk of a contraction. Yet we think U.S. equities will regain global leadership as the AI theme keeps providing near-term earnings support and could drive productivity in the long term.
Using FX to enhance income potential	FX hedging is now a potential source of income, especially when hedging euro area bonds back into U.S. dollars. For example, 10-year government bonds in France or Spain offer more income when currency hedged than U.S. investment grade credit, with yields above 5%.
Seeking alpha sources	We identify sources of risk taking to be more deliberate in earning alpha. These include the potential impact of regulatory changes on corporate earnings, spotting crowded positions where markets could snap back and opportunities to provide liquidity during periods of stress.
Strategic
Infrastructure equity and private credit	We see opportunities in infrastructure equity due to attractive relative valuations and mega forces. We think private credit will earn lending share as banks retreat – and at attractive returns.
Fixed income granularity	We prefer short-term inflation-linked bonds over nominal developed market (DM) government bonds, as U.S. tariffs could push up inflation. Within DM government bonds, we favor UK gilts over other regions.
Equity granularity	We favor emerging over developed markets yet get selective in both. Emerging markets (EM) at the cross current of mega forces – like India – offer opportunities. In DM, we like Japan as the return of inflation and corporate reforms brighten the outlook.

Note: Views are from a U.S. dollar perspective, September 2025. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.

Tactical granular views

Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, September 2025

We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility.

Search views

Asset		Tactical view	Commentary
Equities
United States			We are overweight. Policy-driven volatility and supply-side constraints are pressuring growth, but we see AI supporting corporate earnings. U.S. valuations are backed by stronger earnings and profitability relative to other developed markets.
Europe			We are neutral. Greater unity and a pro-growth agenda across Europe could boost activity, yet we are watching how the bloc tackles its structural challenges before turning more optimistic. We note selective opportunities in financials and industries tied to defense and infrastructure spending.
UK			We are neutral. Political stability could improve investor sentiment. Yet an increase in the corporate tax burden could hurt profit margins near term.
Japan			We are overweight given the return of inflation and shareholder-friendly corporate reforms. We prefer unhedged exposures as the yen has tended to strengthen during bouts of market stress.
Emerging markets (EM)			We are neutral. Valuations and domestic policy are supportive. Yet geopolitical tensions and concerns about global growth keep us sidelined for now.
China			We are neutral. Trade policy uncertainty keeps us cautious, and policy stimulus is still limited. We still see structural challenges to China’s growth, including an aging population.
Fixed income
Short U.S. Treasuries			We are neutral. We view short-term Treasuries as akin to cash in our tactical views and we remove this overweight to turn neutral long-term Treasuries.
Long U.S. Treasuries			We are neutral. Yields could fall further as a softening labor market gives the Fed space to cut without its independence being called into question – even if the pressures pushing up yields persist.
Global inflation-linked bonds			We are neutral. We see higher medium-term inflation, but cooling inflation and growth may matter more near term.
Euro area government bonds			We are neutral. Yields are attractive, and term premium has risen closer to our expectations relative to U.S. Treasuries. Peripheral bond yields have converged closer to core yields.
UK gilts			We are neutral. Gilt yields are off their highs, but we expect more market attention on long-term yields through the government’s November budget, given the difficulty it has had implementing spending cuts.
Japanese government bonds			We are underweight. We see room for yields to rise further on Bank of Japan rate hikes and a higher global term premium.
China government bonds			We are neutral. Bonds are supported by looser policy. Yet we find yields more attractive in short-term DM paper.
U.S. agency MBS			We are overweight. We find income in agency MBS compelling and prefer them to U.S. Treasuries for high-quality fixed income exposure.
Short-term IG credit			We are overweight. Short-term bonds better compensate for interest rate risk.
Long-term IG credit			We are underweight. Spreads are tight, so we prefer taking risk in equities. We favor Europe over the U.S.
Global high yield			We are neutral. Spreads are tight, but corporate fundamentals are solid. The total income makes it more attractive than IG.
Asia credit			We are neutral. We don’t find valuations compelling enough to turn more positive.
Emerging hard currency			We are underweight. Spreads to U.S. Treasuries are near historical averages. Trade uncertainty has eased, but we find local currency EM debt more attractive.
Emerging local currency			We are neutral. Debt levels for many EMs have improved, and currencies have held up against trade uncertainty. We prefer countries with higher real interest rates.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, September 2025

We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility.

Search views

Asset	Tactical view	Commentary
Equities
Europe ex UK		We are neutral. Greater unity and a pro-growth agenda across Europe could boost activity, yet the bloc must tackle its structural challenges before we turn more optimistic. We note opportunities in financials and industries tied to defense and infrastructure spending.
Germany		We are neutral. Earnings growth is supportive relative to peers, and increased defense spending could benefit the infrastructure sector. But prolonged geopolitical uncertainty and fading euphoria over China’s stimulus could dent sentiment.
France		We are neutral. Ongoing political uncertainty could weigh on French companies, whose relative earnings have lagged the broader market. Yet major French firms rely on domestic activity for only a small share of their revenues and operations, shielding them from internal weakness.
Italy		We are neutral. Valuations are supportive relative to peers. Yet past growth and earnings outperformance largely stemmed from significant fiscal stimulus in 2022-2023, which is unlikely to be sustained in the coming years.
Spain		We are overweight. Valuations and earnings growth are supportive compared to other euro area stocks. Financials, utilities and infrastructure stocks stand to gain from a strong economic backdrop and advancements in AI. High exposure to emerging markets and easing Fed policy could boost equities further.
Netherlands		We are neutral. The Dutch stock market’s tilt to technology and semiconductors — key beneficiaries of rising AI demand—is offset by less favorable valuations and a weaker earnings outlook compared to European peers.
Switzerland		We are neutral, consistent with our broader European view. Earnings have improved, but valuations remain elevated compared to other European markets. The index’s defensive tilt may offer less support if global risk appetite stays strong.
UK		We are neutral. Political stability could improve investor sentiment. Yet an increase in the corporate tax burden could hurt profit margins near term.

Fixed income
Euro area government bonds		We are neutral. Yields are attractive, and term premium has risen closer to our expectations relative to U.S. Treasuries. Peripheral bond yields have converged closer to core yields.
German bunds		We are neutral. Potential fiscal stimulus and bond issuance could push yields up, but we think market pricing reflects this possibility. Market expectations for near-term policy rates are also aligned with our view.
French OATs		We are neutral. France faces continued challenges from elevated political uncertainty, high budget deficits and slow structural reforms, but these risks already seem priced into OATs and we don’t expect a worsening from here.
Italian BTPs		We are neutral. The spread over German bunds looks tight given its large budget deficits and growing public debt. Domestic factors remain supportive, with growth holding up relative to the rest of the euro area and Italian households showing solid demand to hold BTPs at higher yields. Domestic political pushback likely prevents defense spending from rising to levels that would resurface fiscal stability concerns.
UK gilts		We are neutral. Gilt yields are off their highs, but we expect more market attention on long-term yields through the government’s November budget, given the difficulty it has had implementing spending cuts.
Swiss government bonds		We are neutral. Markets are expecting policy rates to return to negative territory, which we deem unlikely.
European inflation-protected securities		We are neutral. We see higher medium-term inflation, but inflation expectations are firmly anchored. Cooling inflation and uncertain growth may matter more near term.
European investment grade		We are neutral on European investment grade credit, favoring short- to medium-term paper for quality income. We prefer European investment grade over the U.S. Quality-adjusted spreads have tightened significantly relative to the U.S., but they remain wider, and we see potential for further convergence.
European high yield		We are overweight. The income potential is attractive, and we prefer European high yield for its more appealing valuations, higher quality and less sensitivity to interest rate swings compared with the U.S. Spreads adequately compensate for the risk of a potential rise in defaults, in our view.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, September 2025. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.