BlackRock: Continue to overweight US equities, but underweight relative to benchmark risk exposure to leave room for private markets.

BlackRock's research team believes that despite the high policy uncertainty, the AI theme and strong corporate earnings make BlackRock continue to overweight US equities tactically. In the long run, BlackRock believes that the private market offers attractive investment opportunities that will play a crucial financing role in the economic transformation. Infrastructure equity, such as data center equity, is at the intersection of multiple disruptive trends, including the current AI-driven investment frenzy. To build a portfolio that balances uncertain long-term signals and short-term volatility, the team believes that US equities will remain the main asset allocation, but the overall allocation to US equities will be lower than the benchmark public market exposure to leave room for private market opportunities.

Private equity funds are facing more difficult times due to rising interest rates. However, as valuations decline, private equity funds currently or in the future are expected to benefit. From a medium-term perspective, BlackRock believes that investment opportunities exist in all asset classes as economies undergo transformation driven by disruptive trends such as AI. BlackRock believes that some of the most attractive opportunities may exist in the private market. Although private market assets are also affected by long-term uncertainties, many of them are expected to benefit from disruptive trends.

Despite the record highs of US equities, most valuation metrics show that US equities are at historical highs. However, the AI theme and strong corporate earnings growth have strengthened BlackRock's confidence in US equities tactically. BlackRock finds that from some metrics, the current valuation of US equities, especially technology stocks, is comparable to the peak of the internet bubble or the 1920s. However, judging reasonable valuations becomes more difficult in a transformation period. For example, as investors flock to the AI theme, technology stocks tend to be overvalued. Strong earnings growth may also support valuations, which BlackRock has witnessed, as Nvidia's revenue has risen about six times in just two years, but its valuation is still declining due to the earnings growth being faster than the stock price rise.

BlackRock's current base case is strong corporate earnings in the US, but this outlook has suddenly changed in recent years. Given the current economic transformation and uncertainty brought by US policies, BlackRock is ready to adjust its view. Last year, BlackRock created several potential economic scenarios to help BlackRock navigate this volatile environment. Although some information about US policies is noisy, BlackRock expects this to become a specific signal that needs to be adapted.