“Mega forces,” including the rise of artificial intelligence and the ongoing transition to low-carbon energy, are transforming global economies and reshaping their long-term trajectories, said BlackRock in its market outlook for 2025 released on Dec. 4.
The 2025 global outlook, entitled ‘Building The Transformation’ by BlackRock Investment Institute, the firm’s macro research arm, cited the emergence of AI as one of the premier “mega forces” that will greatly influence global markets and economies.
AI, the firm wrote, “may do more than improve efficiency in specific tasks and could eventually accelerate the process of generating new ideas and discoveries; with far-reaching implications for growth and the composition of the economy.”
Such a transformation, BII said, could surpass the Industrial Revolution in its breadth and impact.
The transition to a low-carbon energy economy, in tandem with AI, is also spurring major innovation In this new and ever-changing landscape, BII thinks investors can find opportunities by “tapping into the waves of transformation” in the real economy.
Capital markets will play a vital role as these mega- forces drive a broad infrastructure buildout, BII noted, adding that investors should “focus more on themes and less on broad asset classes” as mega forces reshape whole economies.
Private markets, BII expects, will play a “pivotal role” for investors, allowing portfolios to gain unique exposure to the AI transformation as public markets can only fund some of it. “For example, private markets can offer exposure to early-stage growth companies driving AI adoption and to vital infrastructure projects,” BII said. “We think the future of finance – a mega force on its own – will be shaped by non-bank lenders increasingly funding such large-scale projects. This highlights why private market assets under management are expected to roughly double by 2029 from 2023 levels.”
The AI buildout, BII added, is creating a “huge and immediate” need for data centers. “Demand for new-build green infrastructure is skyrocketing as countries and tech companies race to reduce emissions.”
Aging demographics, politics
However, BII is concerned by certain other trends, including aging demographics in advanced nations in the west and East Asia as this phenomenon may constrain the labor supply. “Barring any AI-driven productivity gains, that could limit how much economies can produce and grow,” BII stated. “A rise in immigration has blunted this impact in some countries, but likely only temporarily, notably in the U.S.”
BII also addressed geopolitical fragmentation as something for investors to consider.
“As we head into 2025, some countries have new leaders with a mandate for political and economic change,” BII stated. “That could see policymakers pursuing measures that add to volatility rather than stability. Financial markets may work to rein in any policy extremes, such as with fiscal policy.”
At the center of the political fragmentation is Donald Trump's re-election as U.S. president. BII noted this could reinforce geopolitical fragmentation and economic competition. Republican control of both Congress and the White House will allow Trump greater ability to implement much of his agenda.
“Markets view some of his proposed policy as a positive near-term, like tax cuts, deregulation and support for traditional energy,” BII said. However, Trump’s proposed curbs on immigration and a wide range of tariffs that, if implemented, could reinforce geopolitical fragmentation and add to inflation.”
Risk on
With respect to investments, BII remains in a “pro-risk” stance.
“We see the U.S. still standing out versus other developed markets thanks to stronger growth and its ability to better capitalize on mega forces,” BII said in the outlook report, noting the firm is overweight in U.S. equities.
“We don’t think pricey U.S. equity valuations alone will trigger a near-term reassessment,” BII said. “But we are ready to adjust if markets become overexuberant.”
With respect to the Federal Reserve and interest rates, BII cautioned that the central bank is not embarking on a “typical cutting cycle.” “We think (the Fed) will cut further in 2025, and growth will cool a little, but with inflation still above target the Fed won’t have room to cut much past 4%, leaving rates well above pre-pandemic levels,” BII said. “Even with persistent budget deficits, sticky inflation and greater bond market volatility, investors are not demanding much compensation yet for the risk of holding long-term government bonds. We think that will change and see long-term U.S. Treasury yields rising.”
BII also said it expects to see US corporations deliver strong earnings growth over the next six to 12 months, even if the economy slows slightly, thus highlighting the resilience of corporate earnings even if interest rates stay higher.
BII also said it is bearish on U.S. Treasuries, citing that a potentially growing U.S. budget deficit could add to ongoing fiscal pressures, “so we favor government bonds in other developed markets.” BII also prefers corporate bonds over long-term Treasuries “as they offer quality income given relatively healthy corporate balance sheets.”
In foreign markets, Japan stands out for its corporate reforms and the return of mild inflation, driving corporate pricing power and earnings growth. “Structural challenges keep us underweight European equities,” BII said. “Yet we find opportunities at the sector or company level. Longer term, we see some emerging markets like India well positioned to capitalize on mega forces and navigate U.S.-China competition.”
In China, fiscal policy is turning supportive, yet the threat of U.S. tariffs keeps BII “cautious” on the Asian powerhouse.
BlackRock has $11.5 trillion in AUM.
