2025 Equity Outlook: Three key questions for investors to consider

A year that opened with optimism for global equities was rattled at the start of Q2. Far-reaching U.S. tariff pronouncements helped trigger a global market selloff and reignited recession fears in the process.

Against this backdrop, we address three key questions on investors’ minds, as detailed in BlackRock’s Q2 Equity Market Outlook.

How can I invest amid policy uncertainty?

Recent market turbulence is fundamentally driven by uncertainty, particularly as it relates to tariffs. The new U.S. administration’s policies have already started to alter the economic and market equilibrium established in recent years. This shift adds a significant layer of complexity to the balance of opportunities and risks ahead, pointing to the importance of being active in making investment decisions today.

Even leading up to the early Q2 tariff announcements, the administration’s focus on trade and tariffs in the sequencing of policy priorities increasingly captured investor attention. While other policy priorities, including deregulation, have the potential to drive upside in the markets ahead, we expect uncertainty surrounding the impact of tariffs, retaliatory actions, and the cumulative effect of other policy initiatives will continue to drive volatility.

The chart below reveals that by the end of Q1, the number of tariff mentions in news articles ― a proxy for market focus on the topic ― had far surpassed peak levels observed during the 2018-2019 period of tariff escalation in President Trump’s first term.

The path forward will likely be paved with more volatility ― as well as dispersion across sectors, geographies and individual stocks. This points to the importance of considering a more active approach to capitalize on inefficiencies, and to make the most precise and intentional decisions in this time of historic change and transition.

After two consecutive calendar years in which the S&P 500 Index returned more than 20%¹ ― a rare occurrence ― some question whether U.S. stock market leadership will be upended, particularly amid the prevailing unease.

We believe U.S. equity dominance exists on a continuum in which perceptions can range from overinflated to underinflated; Q4 2024 and Q1 2025 offer examples of each. But this perception and the closely tied investor sentiment that drive the U.S. return profile are distinctly different from the fundamental foundations that we believe give U.S. equities an enduring secular advantage.

Corporate strength has long supported U.S. equity fortitude and comes through in earnings and market share. U.S. companies posted earnings growth of more than 18% year-over-year in Q4. This compared to 7%-8% in Europe.²

Beyond earnings growth, we find quality and efficiency to be important hallmarks of the companies that make up the public stock universe in the U.S. Current return on tangible invested capital (ROTIC), a proxy for a company’s ability to allocate capital for optimal profitability, is significantly higher in the U.S. than elsewhere in the world, suggesting quality exists not in pockets but across sectors. See figure 2.

On balance, relatively pro-industry U.S. policies have long stimulated healthy free cash flow. Many companies across time have deployed that cash for future business growth. While policy uncertainty in this time of transition has some companies pausing large investment decisions, we believe potential moves toward deregulation and reshoring of supply chains once policy is settled could ignite capex spending across industries, including technology and industrials.

Our data shows mentions of “deregulation” in Q4 earnings calls were up 20x in the three months relative to the average in the prior four years. Even as the word “tariffs” dominates today, we expect deregulation and other policy priorities to regain attention.

Ultimately, Q1 stock market action reversed some of the more exceptional Q4 moves and continues to play out amid the tariff shocks. Under the surface of broad market moves, tariffs can also contribute to higher return dispersion as company vulnerabilities vary widely based on the global exposure of their business models and supply chains.

Skilled security selection and the ability to dynamically adapt to the fast-evolving policy shifts influencing markets may help investors successfully navigate this complex backdrop.

As U.S. equities declined amid Q1’s growth scare, international equities sharply outperformed, with the largest relative performance difference between European and U.S. indexes in two decades.³ International investments benefited from both strong local returns and a declining dollar, amplifying the returns realized by a U.S. investor.

Here’s our current thinking on various global regions:

Europe: The outperformance of Europe versus U.S. equities was the greatest in any January for a decade⁴,  and the trend continued for much of Q1. Investor flows into European equities have only just started to return after the enormous outflows that followed the start of the Ukraine war, so we believe still underweight positioning supports further rebalancing toward Europe.⁵

Many of the catalysts for Europe’s Q1 move remain in place and could support a resumption of positive momentum as tariff shocks fade. These include:

• The perception that a potential Ukraine peace deal may bring lower energy prices to Europe.
• Historic plans in Germany to unleash spending on defense and infrastructure amid U.S. policy changes and the broader mega force of geopolitical fragmentation.
• Muted inflation, potentially allowing for European Central Bank (ECB) interest rate cuts.
• Hopes that stimulus in China will boost the economy and benefit Europe’s exporting companies.
• Most important, in our view, robust earnings ― growing by more than 7% in the fourth quarter of 2024 versus the same period a year earlier.⁶

In all, we believe European stocks are supported by a unique set of tailwinds in 2025, although it’s important to be selective as not all sectors and companies may benefit equally.

Risks remain. First, tariff machinations cloud the outlook and could hit Europe’s large auto sector especially hard. Second, a Ukraine peace deal may not actually bring much lower gas prices to Europe given the EU’s desire to move permanently away from Russian fossil fuels by 2030. And third, while Germany has the capacity to spend more money and boost growth, some other European countries are constrained by high debt levels.

Asia’s AI Ecosystem: China’s economic outlook remains foggy. U.S./China tariffs are key to watch. In addition, China’s property sector needs more fixing, consumers aren’t spending enough, society is aging fast, geopolitical and economic tensions have risen and fiscal reforms continue to underwhelm.

While all of this undermines short-term equity market performance, AI is about the long term. DeepSeek’s large language models advanced the conversation on AI, stressing efficiency in technology and capital deployment. The buildout to general purpose AI will still require massive investment over multiple years. In the short horizon, China’s AI-empowered tech companies could stimulate consumer and business demand in ways monetary and fiscal policies have not. 

We see three reasons for this:

• First, these companies, particularly the internet commerce giants, have a pulse on people’s wants and incentives to spend.
• Second, both enterprises and individuals in China are known for their strong impulse to adopt new technology.
• Third, tenuous geopolitical and global trade dynamics compel policymakers to focus on domestic growth engines, and private enterprises appear optimally positioned. President Xi Jinping’s recent meetings with company executives could signal a new era of cooperation.

Our analysis finds that the pre-tariff surge in China-listed shares of diversified internet commerce giants with cloud services was well-grounded in fundamentals. An optimistic view could see the positive momentum broadening in the market. Yet caution and a selective approach is warranted as China’s economic story continues to evolve and geopolitical factors, including those related to U.S. policy, feature heavily.

Beyond China specifically, Asian countries are embracing the AI revolution, from the big infrastructure build to adoption via applications and automation. Japan, for example, has led in efforts to use technology to address societal problems such as the aging population and labor shortages.

Since Chat GPT came out at the end of 2022, correlations across the AI opportunity set have varied widely within Asia. They’ve also shown differentiation relative to their U.S. counterparts in the NASDAQ 100. Our calculations show correlations in the area of 64% for hardware and semiconductors and about 38% for application and physical AI.⁷

For investors looking forward to the long-term AI opportunity, we believe a global approach to investing in the theme could gain from Asia’s ample breadth, liquidity and potential for sector and currency diversification.

AI seemingly moves at two speeds: fast and faster, blurring the lines between buildout and adoption and fast-tracking productivity gains many anticipated could take years to realize. We believe Asia’s technology titans and intellectual capital are contributing to the time squeeze and, in the process, expanding potential investment opportunities.