Investors need to focus more on the underlying drivers of risk and return across the portfolio and less on asset class labels because of new structural forces, according to the BlackRock Investment Institute (BII).

Rapidly rising corporate earnings forecasts and higher government bond yields might seem hard to reconcile, yet five years after the last economic downturn, consensus earnings forecasts for 2026 are still being revised higher, not lower.

“We see this as evidence of structural forces at play,” the BII argued. It expects US corporate earnings to grow by 11.6% a year over the next five years, conditional on AI adoption boosting productivity and profit margins.

“But the fact that it is plausible underscores why we cannot apply a typical business cycle playbook to long-term portfolios in this environment,” it said.

The same forces supporting corporate earnings are have driven government bond yields higher since 2021. “That aligns with our long-held view of a world shaped by supply scarcity, where investors demand more compensation for holding long-term government debt,” said the BII.

“Rising public borrowing, greater inflation uncertainty and more volatile bond markets have reinforced that trend”, and the BII think long-term yields have more room to run.

“Governments, AI hyperscalers and companies across the economy are competing ever more intensely for capital, keeping upward pressure on long-term government bond yields.”

“This environment calls for a different approach to portfolio construction as long-standing macro anchors investors have come to rely upon, such as stable inflation expectations, become less reliable. The industry’s growing focus on a total portfolio approach reflects that shift,” the BII said.

The institute remain underweight global investment-grade credit because tight spreads offer little compensation for additional duration risk, and instead favours some private credit, including direct lending, where “resilient cash flows, stronger lender protections and recovery value can provide durable income”.

However, the widening gap between stronger- and weaker-performing managers and borrowers, reinforces the importance of manager selection.

The BII prefers growth exposure through equities and private infrastructure equity over high yield credit. Tighter spreads prompted its new strategic underweight in high yield this quarter and reinforce its view that equities are better positioned if earnings strength persists.

It sees valuations falling as earnings growth outpaces share price gains, allowing multiples to decline over time. Hence it prefers “targeted exposures, such as in technology and healthcare, where structural shifts support earnings growth”. It also sees opportunities in infrastructure equity through investment in power, grids and data centres.