Our views for the second quarter

We see the overall environment as positive for risk assets, but expect more muted returns and higher volatility than in 2017. The U.S. tax overhaul and public spending plans have supercharged growth and earnings estimates, but also have added uncertainty to the economic outlook. We see two major risks to the global expansion and risk assets: trade wars and a spike in real yields.


1. Room to run

The U.S. economy is getting a fiscal shot in the arm just as it reaches full capacity. We see tax cuts and public spending driving faster growth, but that could hasten the economic expansion’s expiration date if it does not come with productivity gains. We expect emerging market growth to quicken in 2018, and still see robust growth in Europe, albeit at a slower pace than consensus.

2. Inflation comeback

Inflation in perking up, led by the U.S. We see U.S. inflation move back toward target – and this should help the Federal Reserve forge ahead with raising rates. Inflation remains muted in Europe and Japan, supporting ongoing monetary accommodation there.

3. Reduced reward for risk

We see the low-volatility regime sticking for longer, but see potential for episodic spikes amid rising risks. Steady-above trend global growth is supportive of low-vol regimes, yet we see the potential for greater macroeconomic uncertainty – and volatility.


Rising U.S. protectionism is the clearest menace to the near-term global outlook, in our view. We see increasing U.S. actions against China and other countries sparking bouts of volatility but not derailing the benign economic and market backdrop. Yet any escalation into a trade war could deal knock-on blows to sentiment and change our view. A renewed surge in bond yields is another risk, but we believe equities can do well as long as yield rises are steady and driven by improving growth.

Market views

We like equities. U.S. earnings revisions have rocketed higher to factor in the boon from lower corporate taxes — and earnings momentum is rising across the world. We favor U.S. and emerging market (EM) equities but we see choppier markets and less-heady returns than last year ahead. We prefer technology, financials and the momentum style factor. We are negative on government bonds overall but see short-maturity Treasuries now offering a compelling risk/reward proposition. We are neutral on credit amid tight spreads and increasing sensitivity to rate rises.

  • BlackRock Investment Institute – April 2, 2018

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