Institutional allocators face new, complex dynamics across the investment universe in 2025. Even as opportunities abound across the public and private markets, with new technologies and innovations presenting broad opportunities, investors are pursuing a measured and selective path forward – with a watchful eye on potential macro and market risks. Two leading asset managers delve into different asset classes that investors can consider today in terms of their current drivers, unique investing considerations and risk-mitigating strategies: BlackRock on equities and IFM Investors on infrastructure.

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The broad U.S. equity market returned over 20% in 2023 and 2024. This level of strong consecutive returns is uncommon, as it’s just the third time it has gained at least 20% in consecutive years since 1935 and 1936, according to Macrotrends. Experiencing a potential third year of 20%-plus returns could be considered an anomaly.

Tony DeSpirito, global chief investment officer for fundamental equities at BlackRock, believes that while a 20%-plus return in 2025 is unlikely, the U.S. is positioned for a healthy year of returns closer to the historical norm of about 10%. He highlights an active and selective approach across equity markets that will likely be more important moving forward.

The case for optimism starts with the resolution of the U.S. presidential election in November, which eliminated investor uncertainty about the outcome. The economic backdrop is favorable as well, DeSpirito said, citing the growth in GDP, corporate profits and strong spending by affluent consumers. He additionally pointed to reasonable consumer debt ratios for both home equity loans and credit cards relative to GDP.

It’s really the mega-cap stocks that are expensive, while plain, run-of-the-mill large-caps are attractively priced. There’s a lot of opportunity in those large-caps that investors aren’t seeing as clearly.

Tony DeSpirito

Global Chief Investment Officer,   
Fundamental Equities, BlackRock

Another potential boon for active management in equity investing is rising turnover in corporate management. “Our research shows that management turnover has risen sharply in the past couple of years,” DeSpirito said. “It should go up even more if mergers and acquisitions activity picks up this year, as we anticipate. This type of corporate change creates opportunities for stock pickers.”

Read: Taking Stock: Q1 2025 equity market outlook

Certain market-level factors bode well for returns this year. For instance, S&P 500 earnings in 2023 were dominated by the “Magnificent Seven” technology names: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla, although this pattern began to change in the second half of 2024, when the index’s earnings growth began to broaden.

DeSpirito expects that to continue. “In 2023, the gap between the Mag Seven’s earnings growth rate versus the rest of the S&P 500 was 37%. The gap narrowed in 2024, and it should narrow again in 2025 to the high single digits,” he said. “It’s coming from both ends — earnings growth for the Mag Seven is slowing, but in the rest of the market it’s picking up.”

Indeed, 2025 is shaping up as a stock picker’s market, in DeSpirito’s view. The broadening universe of strong earnings growth is just one of several drivers. He sees potential gains in healthcare and artificial intelligence, as well as in large-capitalization stocks generally.

Healthcare. There are good reasons for DeSpirito to significantly overweight healthcare in his portfolios. The first is demographics: Developed-market populations are aging and, as they do so, will consume a disproportionate share of healthcare goods and services. This built-in demand should help to buoy longer-term earnings growth for many healthcare companies.

The dispersion of returns among healthcare stocks — the difference between the returns of the best and worst performers at any given time — is another plus. A wide dispersion indicates plenty of room for lower-returning names to improve their earnings growth. “Healthcare is a top-three sector when it comes to dispersion being really wide, meaning there’s real value-add from stock picking there,” DeSpirito said.

He noted several other drivers of potential gains. For instance, demand for healthcare isn’t dependent on the economy, which insulates it from the ups and downs of economic cycles. It’s a sector in which innovation is high, exemplified by the revolutionary GLP-1 weight-loss drugs. Also, valuations of healthcare stocks are generally low relative to their history.

AI. DeSpirito likes the high-growth artificial intelligence sector. “We think the evolution of AI will happen in layers, similar to earlier technologies, such as the internet. The AI world will broaden this way, and we think its gradual layering should present many opportunities for stock pickers.”

A good example is how AI can enhance existing software programs. Some software will be replaced by AI while other more nimble software providers can add AI agents to their programs, effectively making the software more useful and more valuable, and the software’s users more efficient. “This goes straight to the case for stock picking,” DeSpirito said. “It’s really the bailiwick of fundamental active managers to pick winners and losers, making AI a great area for us to invest in.”

Large caps. Much has been made about the ascendance of mega-cap stocks, whose market capitalization runs into the trillions. Subtracting the 10 biggest mega-caps from the S&P 500 puts the average market cap at about $121 billion, which is what DeSpirito considers the size of a normal large-cap stock.

“It’s really the mega-cap stocks that are expensive, while traditional large caps are attractively priced. There’s a lot of opportunity in those large caps that investors aren’t seeing as clearly,” he said.

DeSpirito said several risks keep him up at night.

The first is a resurgence of inflation. Despite the Federal Reserve’s efforts to bring inflation down, going the “last mile” — from its current level around 3% to the Fed’s 2% target inflation rate — has been difficult. Research also shows that over the last century, there was a 90% probability that a period of high inflation, defined as 6% or higher, would be followed by another such period within the next two years.

In addition, DeSpirito pointed out that the Fed’s latest rate cuts have come at a time of economic strength — and not weakness, when stimulus typically is needed. Adding fuel to the fire via more cuts in 2025 could help to push inflation higher.

The second risk involves the equity risk premium, which is the amount investors are willing to pay for equities that exceeds the risk-free yield on Treasury debt. A positive premium means investors accept risk, and a negative premium means they don’t. DeSpirito calculates that the current premium is negative and lower than historical averages.

The third area to watch out for: equity valuations. Studies have shown that market valuations are inversely predictive of longer-term returns: Higher valuations mean lower returns and vice versa. The fact that current market valuations are relatively high suggests that returns could be lower over the next decade.

The fourth area of risk is policy uncertainty. With any new administration come policy changes, some of which will be favorable to markets while others won’t. How this balance shakes out remains to be seen, DeSpirito said, noting that so far, the markets have been optimistic.

Read: Stock investing insights to start 2025

How can institutional allocators buffer their U.S. equity portfolios against risk at a time of market volatility and potential external shocks? DeSpirito recommended adding non-U.S. exposure and raising allocations to value stocks.

With regard to non-U.S. names, he noted a favorable valuation gap that’s widening. As measured by P/E multiples, non-U.S. stocks are trading at a 37% discount to the U.S. market. That’s nearly double the historical discount of around 20%.

DeSpirito cautions against buying non-U.S. stocks primarily based on valuations, however. In some cases, “the baby gets thrown out with the bath water,” he said. For instance, “a non-U.S. company could be high quality, but its stock price hasn’t done as well simply because it’s in a foreign market. I’d focus on finding those company-specific non-U.S. stocks that are high quality but out of favor due to their location.”

Value stocks should benefit from their underperformance versus growth stocks. Over the last two years, according to DeSpirito, the difference in returns between growth and value is a record-high 63 percentage points. Assuming an initial equal allocation to each, client portfolios could be significantly out of balance, which points to a runway that could add more value.

Relative valuations support the value case as well. “Value stocks, by definition, are always trading at a discount,” DeSpirito said. “Normally, their P/E ratio is 82% of the S&P 500 P/E, but that percentage is about 58% today. So, today’s discount is ultrawide versus history. This presents a good opportunity for investors.”

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As institutional allocators navigate new market complexities stemming from macroeconomic uncertainties, such as the pace of inflation, and potential geopolitical turbulence, they’re looking for diversification that can withstand market volatility. Infrastructure, which can provide resilient returns alongside a level of inflation protection, offers an attractive solution. Investors can pursue it both as a defensive core allocation and for growth through exposures that benefit from population growth and general economic expansion, as well as decarbonization and digitalization megatrends.

“Infrastructure is an all-weather type of investment. One of the great features of private infrastructure is that it performs well in a variety of market environments — it is both resilient and defensive,” said Andrea Mody, head of North America clients and strategy at IFM Investors. “While the markets have been doing well, anything can upend that,” which makes it an opportune time to consider infrastructure, she said. “You see less volatility in the return profile because infrastructure is something that everyone generally has to use, no matter the market conditions.”

“A great feature of infrastructure is that depending on what you’re investing in, it can provide either yield or growth — or both,” Mody said. “We see investors allocating across the risk-return spectrum. It depends on what the investor is trying to achieve and what the investor’s existing portfolio allocation looks like.”

Infrastructure is an all-weather type of investment. One of the great features of private infrastructure is that it performs well in a variety of market environments — it is both resilient and defensive.

Andrea Mody

Head of North America Clients and Strategy,   
IFM Investors

Transportation and energy, each of which offer several investible subsegments in an evolving economy, offer strong return potential and inflation protection. “As we think about this year, one of the things we like about core infrastructure is that it typically has either explicit or implicit inflation protection through its revenue streams,” Mody said. For example, regulated utilities often have built-in price increases that are linked to the rate of inflation. Also, she pointed out, in an expanding economy, demand for infrastructure typically increases as business and consumer activities expand.

“Core infrastructure and infrastructure debt can have a yield component,” she said. “For investors looking for income, they can be really good supplements to their portfolios.” As private credit markets have developed in recent years, more opportunities in infrastructure debt have emerged that offer investors downside protection and yield.

Institutional allocators who are more growth oriented seek to capture higher risk-adjusted returns via infrastructure investing, Mody said.

When looking at supportive growth fundamentals, several types of businesses need capital for maintenance expenditures and for new project development, particularly those related to the energy transition and digital trends, said Julio Garcia, head of infrastructure, North America, at IFM Investors. There has been strong expansion in digital infrastructure as advancements in artificial intelligence and cloud computing demand more processing power and storage. “Businesses are increasingly dependent on technology and have been moving more of their data-processing and storage needs off their premises, which has created interesting opportunities for large-scale deployment, particularly in data centers and fiber networks.”

Alongside these trends, traditional infrastructure in transportation and energy — the backbone that supports economies — remains critical, he added. “We’re in an environment where we believe those segments will continue to have strong growth. Freight movements were strong during the pandemic, and we have seen the rapid bounce back in airline travel as health restrictions were lifted. We are also seeing that the strong growth in digitization is also creating additional need for electricity,” Garcia said. Historically, electricity growth followed population growth, but now electricity demand has accelerated. “We’ve seen over the past couple of years how important it is to have robust data networks and be able to connect from anywhere.”

Read: Adding Value Through Capex

In addition, while allocations to private infrastructure are still only half of what they are to private real estate, that could change, Mody said. “We think some of the cyclical changes within the real estate market mean that we’re going to see a shift where allocations to infrastructure could increase and equal or surpass those to private real estate.”

While pension funds and sovereign wealth funds in Australia, Europe and Canada have used private infrastructure for many years for inflation protection, yield and total return, U.S. allocators are generally newer to investing in this space. Infrastructure is a relatively nascent asset class for U.S. allocators, but it has been growing as investors seek inflation protection and resilient growth, Garcia said. “Unlike portfolios with high-single-digit and even double-digit percentage allocations seen outside of the U.S., allocations to infrastructure here are still in their early stages but showing significant interest and growth.”

Typically, first-time investors take a conservative approach, focusing on core infrastructure strategies. “As they get more comfortable and more educated about the benefits of the asset class, they get more interested in the growth aspects and the new development that’s required in infrastructure,” Mody said. “So we see them go up the risk curve and also make allocations across the capital stack.”

While specific allocations depend on the investors’ objectives, taking a holistic portfolio approach is important, Garcia said. If yield is a priority, debt and core are going to be more beneficial, with core providing the most inflation protection and a solid level of growth. “If you’re looking for higher expected returns, but perhaps with less risk than private equity for instance, then core-plus or value-add could be effective strategies,” he said. “Many investors allocate across a number of risk profiles, rather than trying to pick one subsegment, to get a more holistic allocation across their infrastructure portfolios.”

Liquidity can also be a consideration. “Potential allocators sometimes think of private infrastructure very much like other private asset classes, such as real estate or private equity, where liquidity is dependent on fund features,” Garcia said. But many infrastructure investments generate significant cash flow — a feature that can provide near-term liquidity, which not all investors may realize.

“Infrastructure typically involves very large capital expenditures, so it can be daunting to investors who are allocating to the asset class for the first time,” Mody said. “But there has been innovation around the way investors can get liquidity in times when they need it, and for investors who are looking for that, we’ve been able to make it available.” IFM Investors offers an open-end infrastructure fund that can meet that need.

Whatever their portfolio objective, institutional allocators should prioritize working with an asset manager who has deep experience in infrastructure investing across a wide range of market cycles — and they may not find domestic managers with long track records, Mody said. IFM Investors, for example, has been managing infrastructure investments for more than 30 years. The company was founded in the 1990s by a group of Australian pension funds, which has given it a unique structure in the asset management world.

“Our owners are also large investors in our funds,” said Garcia. “That creates an alignment of interests that is very strong, and it drives how we recruit staff, how our teams look at investments, and what we’re ultimately doing for institutional allocators and their member beneficiaries around the world.”

As investors keep a watchful eye on macroeconomic uncertainties, infrastructure may better withstand a potential downturn, he added. “Infrastructure investments have been tested through previous economic cycles, a global pandemic and rapid increases in inflation. The asset class has shown to be resilient,” Garcia said. “If we went into a long recessionary period, certainly the asset class would see an impact. However, we think in that scenario, the defensive characteristics of infrastructure would help it remain far more resilient than many other asset classes, particularly listed equities, and so it would provide some important balance in investors’ portfolios.”

Listen: IFM's Global Head of Infrastructure, Kyle Mangini, Shares His Thoughts on How Infrastructure Helps Build a Resilient Portfolio