A seismic economic shift, not a mere business cycle: Lessons from 2024

The global economy is in the midst of seismic economic transformation – not simply a changing business cycle – with accelerating structural shifts in 2024 expected to reshape and expose volatilities in global markets in the years ahead, according to investment giant BlackRock.

Investors last year were exposed to a number of unique circumstances, including a failure of time-tested recession indicators, a surging US equities market (up more than 20% in 2024) driven by emerging bigtechs, and the whims of policymakers and technology innovators (notably, AI developers) creating new sources of market disruption and opportunities, the BlackRock Investment Institute (BII) wrote in its 2024 retrospective.

These conditions indicate significant structural changes (driven by five ‘mega forces’) reshaping economies and global markets, rather than the movements of a traditional business cycle, according to the BII.

The stubborn persistence of this myopic ‘business cycle lens’ led to frenetic investor activity last year, “[spurring] recession fears and brief stock selloffs”, BlackRock wrote, including the most recent retreat in December which BII analysis revealed was “the sharpest stock slide in decades to follow a Fed cut during a bull market”.

“Structural changes mean rethinking long-held investment principles – like the assumption growth will eventually revert to its historical trend.”

The BII, factoring in its views on structural transformation, has flagged opportunities in tech innovation and AI-adjacent industries. It has thus taken an overweight position on US equities, which it said “isn’t shaken by the Fed’s signal of fewer rate cuts”.

“Our overweight is grounded in the artificial intelligence (AI) theme, robust economic growth and broadening earnings growth. Soaring tech valuations and the concentration of returns in just a few tech companies caused some market jitters.”

Market concentration is regarded by the BII as a “feature” rather than a “flaw” of transformation.

Transformation is also accelerating at breakneck pace, with the BII warning investors to brace for “more volatility and surprises than usual”, citing the sudden emergence and criticality of “hyperscalers”, an industry that had “barely entered the public lexicon”.

“Public policy is another area we expect to see swift change. We think policymaking could itself become a source of disruption and surprises – in an already more fragile world given heightened strategic competition between the U.S. and China. Trade protectionism is shaping up to be a key risk in 2025.”

Opportunities ahead

Following the lessons gleaned from 2024, the BII said its highest conviction opportunities over the immediate term (the next 6-12 months) lie within US equities, Japanese equities and certain fixed income instruments.

“Robust economic growth, broad earnings growth and a quality tilt underpin our conviction and overweight in US stocks versus other regions,” the BII noted, with artificial intelligence (AI) buildout and adoption driving opportunities across multiple sectors.

Japanese equities are benefiting from the government’s corporate reforms, driving improved earnings and shareholder returns. However, the BII conceded that a potentially stronger yen could be a potential drag on earnings.

The BII flagged opportunities outside the US for fixed income, notably Europe, with concerns over persistent deficits and sticky inflation in the US.

“We are underweight long-term US Treasuries and like UK gilts instead. We also prefer European credit – both investment grade and high yield – over the US on cheaper valuations.”

Longer term, the BII sees opportunities in infrastructure equity and private credit, short- and medium-term investment grade credit, and a tilt towards emerging markets over developed, particularly in India and Saudia Arabia, which lie at the cross-section of its five ‘mega forces’.