US equities are likely to regain global leadership with the AI sector expected to support near-term earnings and boost productivity in the longer-term, according to BlackRock.
The asset manager, who remains overweight on US equities, also believes that tax cuts and deregulation in the US will further boost investor sentiment.
In its latest weekly market commentary, BlackRock said while tariff and tax policy have returned to centre stage, it is confident that “immutable laws will limit extremes” in relation to tariffs.
“The US now looks to be taking a more flexible approach to tariffs. While the current effective tariff rate of 15 per cent is still the highest since the 1930s, we’ve repeatedly seen that immutable laws prevent fast deviation from the status quo,” it said.
In the past few months, there have been carve outs for some industries and a resumption of trade talks between the US and China.
BlackRock also noted that US debt sustainability relies on foreign investors which was likely a factor in the 90-day pause on tariffs that had spiked yields.
“We don’t see a return to April’s maximal tariffs and trade uncertainty is now well below April’s highs,” it said.
Major tax and regulatory reforms focused on promoting growth are also likely to boost investor sentiment, according to BlackRock.
The US budget bill, currently under review, will extend and expand the cuts in the Tax Cuts and Jobs Act of 2017.
US multinational companies have also been exempted from the Pillar 2 taxes imposed by G7 nations in exchange for the removal of Section 899 from the budget bill – a provision that would have allowed taxes on foreign investors in US assets.
BlackRock is also tracking regulatory changes that could benefit artificial intelligence and future of finance mega forces.
“The US administration is set to release an action plan to promote competitiveness in the global AI race,” it said.
“State-level deregulation is also advancing. In West Virginia, a new law allows data centres to bypass zoning ordinances and leverage their own power sources rather than local utilities.”
If reform passes at the federal level, and tax cuts are able to unleash more capital for companies to invest in the AI buildout, BlackRock said this could fuel economic growth.
“It could also create opportunities in energy infrastructure, especially in private markets,” it said.
In addition, BlackRock said the GENIUS Act could advance the future of finance mega force by giving stablecoins a clear regulatory framework that fosters wider use.
“We think these market-friendly policies could fuel animal spirits, supporting our US equity overweight,” BlackRock said.
The asset manager still prefers European credit, both investment grade and high yield, over the US due to more attractive spreads.
It also prefers short-term inflation-linked bonds over nominal developed market government bonds, as there is a risk US tariffs could push up inflation.
“Within developed market government bonds, we favour UK gilts over other regions,” BlackRock said.
