After US stocks, bonds and the dollar fell in unison last month following the initial shock of Trump’s tariff announcements, investors started to question the long-term appeal of US assets.
However BlackRock, the world’s largest asset manager, still views US assets as core to portfolios, according to a note from its strategists at the BlackRock Investment Institute.
“When equities slid, so did the U.S. dollar and Treasuries – spurring talk of investors losing confidence in U.S. assets,” the strategists said. “We don’t think that’s the case.”
“The dollar is still historically strong. And we have long argued that investors would want more term premium, or compensation, for holding long-term U.S. bonds given persistently large fiscal deficits, sticky inflation and bond volatility.”
Last week, bond rating agency Moody’s downgraded the US government’s credit rating, although it was the last of the three major agencies to downgrade the country.
“Moody’s U.S. rating cut reinforces our long-held view that investors would want to see a rise in today’s relatively low compensation for the risk of holding long-term U.S. bonds,” the strategists said.
“The downgrade reinforces the U.S. fiscal sustainability challenge that we’ve long flagged, especially persistent U.S. budget deficits at a time when higher interest rates are boosting debt servicing costs.”
“If these dynamics dent the confidence of foreign bond holders, rising term premium could push up bond yields and debt servicing costs even more.”
This is why the strategists continue to expect rising term premium for U.S. Treasuries and persistent inflation pressure, and are overweight inflation-linked bonds and neutral global investment grade credit, given wider spreads.
Sticking to US stocks
When it comes to US stocks, BlackRock is sticking to its overweight call on a six to 12-month tactical horizon due to US corporate strength and the presence of mega forces such as AI.
Indeed, US stocks have jumped roughly 22% from the lows in April with technology socks leading the gains.
The strategists said: “Big structural shifts like AI that are driving an economic transformation on a par with the industrial revolution.”
“The end state of that transformation is unknowable, making longer-term asset allocation extremely challenging.”
To deal with this, the strategists are developing multiple long-run capital market assumptions for the first time, in order to know how to pivot portfolios should other scenarios play out.
they said: “What is our starting point scenario for our strategic views? We believe it has to be the current structure of the global capital market – with U.S. assets still core to portfolios.”
“That’s because hard economic rules limit how quickly the structure can change. The recent 90-day pause on many U.S.-China tariffs illustrates one such rule: Supply chains can’t be rewired quickly without disruption.”
