BlackRock Bullish on U.S. Equities Amid AI Growth, 6% Earnings Boost

BlackRock, the world's largest asset manager, has expressed a bullish outlook on U.S. equities compared to European stocks, driven by the continued strength of the "American Exceptionalism" narrative, which is being bolstered by advancements in artificial intelligence (AI). Despite the market's high level of uncertainty, BlackRock's Investment Institute argues that U.S. stocks remain the optimal allocation in the current risk-on environment. Investors are advised not to prematurely dismiss the "American Exceptionalism" thesis, as the U.S. continues to lead in innovation and technological advancements, particularly in the AI sector.

The firm's optimism is underpinned by the U.S.'s robust economic fundamentals and its position as a global leader in AI development. The integration of AI across various industries is expected to drive significant growth and productivity gains, further cementing the U.S.'s competitive edge. BlackRock's perspective aligns with the view that the U.S. market will continue to outperform its European counterparts, as the region struggles with structural challenges and slower growth prospects.

BlackRock's global chief investment strategist, Wei Li, highlighted that the overall market remains in a risk-on state, despite high levels of uncertainty. This view contrasts with some investors who have called for reducing exposure to U.S. equities due to the market disruptions caused by Donald Trump's trade and fiscal policies earlier this year. These investors had advocated for diversifying away from U.S. stocks in response to the shaken confidence in the world's largest economy.

While the S&P 500 index has seen a return of over 5% this year, it still lags behind the Stoxx Europe 600 index, which has risen by nearly 7%. This performance is attributed to market expectations of increased fiscal stimulus in Europe. In dollar terms, the European index has returned approximately 22% year-to-date, reversing the trend of recent years where the U.S. benchmark index significantly outperformed other developed markets, largely due to the surge in U.S. tech giants' stock prices.

BlackRock anticipates that U.S. corporate earnings will grow by 6% year-over-year in the second quarter, compared to around 2% in Europe. According to BlackRock's data, U.S. companies' earnings growth in the first quarter reached 14%, far outpacing Europe's 2%. The next earnings season for U.S. companies is set to begin this month. Michael Pyle, vice chairman of BlackRock's portfolio management team, emphasized that the underlying resilience, dynamism, and innovation potential of the U.S. stock market remain unmatched.

Li further noted that U.S. Treasury bonds are less attractive compared to U.S. equities, as Trump's trade policies could drive up inflation, making investors' expectations for Federal Reserve rate cuts overly optimistic. Additionally, the tax reform bill being debated in Congress could exacerbate the U.S.'s already high debt burden, putting further pressure on long-term U.S. Treasuries. This reduces the reliability of U.S. Treasuries as a hedging tool within investment portfolios.

Li suggested that U.S. investors could consider hedging currency risks and allocating to European bonds, a strategy that could offer higher yields than the domestic market. This approach acknowledges the potential for European bonds to provide a more stable and higher-yielding investment option, given the current market dynamics and the expected impact of fiscal stimulus in Europe.