BlackRock bets on AI-driven stocks rally but US debt clouds 2025 outlook

NEW YORK : BlackRock expects the artificial intelligence boom to continue to boost U.S. stocks next year and support economic growth more broadly, although rising U.S. government debt levels could threaten its upbeat 2025 forecasts.

Innovations in AI technology will likely benefit U.S. stocks more than their European peers, while private markets will increasingly play a key role in financing AI-related infrastructure, the BlackRock Investment Institute, a research arm of the world's largest asset manager, said on Wednesday.

"We stay risk-on ... and go further overweight U.S. stocks as the AI theme broadens out," it said in a 2025 outlook report based on views of senior portfolio managers and investment executives at BlackRock, which manages $11.5 trillion in assets.

While U.S. economic growth may cool a little next year, the Federal Reserve will likely not be able to meaningfully lower interest rates as inflation remains sticky and above the central bank's target, the institute said. It does not expect interest rates to go below 4 per cent from their current 4.5 per cent-4.75 per cent range.

Continued price pressures due to factors such as geopolitical fragmentation and infrastructure expenditure could weigh on the bond market.

Investors will likely demand higher compensation to hold long-term government debt to account for inflation and wide U.S. deficits, it said. This will put upward pressure on long-term Treasury yields, which move inversely to prices.

"We are underweight long-term U.S. Treasuries on both a tactical and strategic horizon – and we see risks to our upbeat view from any spike in long-term bond yields," it said.

BlackRock prefers U.S. corporate debt over Treasuries, as well as government bonds in other developed markets such as the United Kingdom, where the Bank of England will cut interest rates more than what the market is pricing, the institute said.

In stocks, it favors sectors such as tech and healthcare, while it sees assets like gold and bitcoin as alternatives to government bonds to offset stock market declines.

BlackRock this week announced plans to buy credit investment manager HPS Investment Partners for about $12 billion, in a deal that will further its offerings in private credit, a key area of growth for the New York-based asset manager.

"Private markets can offer exposure to early-stage growth companies driving AI adoption and to vital infrastructure projects," the BlackRock Investment Institute said.

"In private markets, we stick to our long-term preference for infrastructure equity due to attractive relative valuations and mega forces," it said. "For income, we prefer direct lending given more attractive yields in private credit."