The BlackRock Investment Institute upgraded developed market (DM) equities on Tuesday on the back of artificial intelligence (AI) driving earnings upgrades.

The firm cited an AI-driven productivity boom that could sustain stronger growth and earnings over the long run, which in turn could justify higher equity valuations.

It pointed to a broadening out of earnings expectations where the gap between the ‘Magnificent Seven’ and the rest of the S&P 500 index has fallen from 31% in 2024 to an expected 3% in 2027.

“Leadership is also broadening across regions and sectors, as AI reshapes markets beyond asset classes,” the firm said.

“The technology sector is a larger share of the MSCI EM Index than it is of the S&P 500, reflecting Taiwan’s and South Korea’s key role in the AI supply chain.”

“All this underpins our DM equities upgrade and existing EM equities overweight on a long-term horizon.”

The firm also downgraded DM government bonds to underweight and downgraded high yield bonds to neutral and because “investors can participate in equity upside rather than be capped by coupon income”.

BlackRock also maintained its overweight to inflation-linked bonds on expectations of more persistent inflation over a longer time horizon of over five years.

For investors seeking an alternative allocation, the firm said it favored infrastructure: “We think infrastructure can do well under all our scenarios as it has historically been resilient in periods of market stress.”

“Most investors can up their holdings materially, depending on their tolerance for illiquidity risk, or the risk of being unable to sell an investment quickly.”