BlackRock Bullish on U.S. Equities Amid Policy Shifts, AI Growth

BlackRock has expressed a bullish outlook on U.S. equities, citing a reduction in global trade uncertainties. The firm believes that economic fundamentals will prevent tariff rates from returning to the high levels seen in early April. This optimism is driven by the implementation of significant tax policies and regulatory reforms, which are expected to support current risk appetites and favor U.S. stocks.

The firm's positive stance on U.S. equities is further bolstered by the anticipated strong earnings growth fueled by advancements in artificial intelligence. The U.S. government is preparing to release an action plan to enhance its competitiveness in the global AI race. Additionally, regulatory relaxations at the state level are progressing. For instance, a new law in West Virginia allows data centers to bypass zoning regulations and use their own power sources without relying on local public utilities. If these reforms are implemented at the federal level and combined with tax cuts that free up more corporate funds for AI investments, they could stimulate economic growth and create investment opportunities, particularly in the private market and the energy infrastructure sector. The proposed "Genius Act" aims to provide a clear regulatory framework for stablecoins, which are digital currencies backed by liquid assets like cash or short-term government bonds. This could promote their wider application and drive the evolution of the financial system.

In the realm of tax policy, the U.S. Congress is reviewing a budget bill that extends and expands the tax cuts introduced by the 2017 Tax Cuts and Jobs Act. This could boost investor confidence. Another confidence-boosting factor is the exemption granted by the G7 to U.S. multinational corporations from a series of taxes, in exchange for the U.S. budget bill repealing Section 899, which previously allowed for the taxation of foreign investors' assets in the U.S.

Regarding regulatory reforms, the Federal Reserve has proposed modifications to the supplementary leverage ratio (SLR) requirements for banks. This change aims to release U.S. bank capital, enabling them to hold more government bonds and potentially offset the reduced demand for U.S. bonds from foreign investors. While the impact of this reform on bank lending may not be as significant as in the past due to the rise of private credit as an alternative, it is still expected to provide financing support for the real economy.

BlackRock also highlights two disruptive trends that could shape the future landscape of AI and the financial system: regulatory changes. The firm believes that these market-friendly policy shifts could invigorate market activity, supporting its overweight stance on U.S. equities. Compared to government bonds, BlackRock has a more favorable view of credit bonds. Within the government bond market, the firm continues to prefer short-term and medium-term securities over long-term ones. As market expectations for rate cuts fluctuate and short-term market momentum persists, long-term bond yields may temporarily decline. However, sustained inflation will limit the Federal Reserve's ability to cut rates significantly, and high deficits will prompt investors to demand higher compensation for holding long-term government bonds, resulting in a term premium.