BlackRock Investment Institute is maintaining its pro-risk stance, favoring U.S. equities over long-term government bonds, even as renewed Middle East conflict and a sharp semiconductor selloff test global markets. The world’s largest asset manager believes strong corporate earnings growth will continue to outpace the rising cost of capital.
Renewed tensions in the Middle East followed the collapse of a short-lived U.S.-Iran diplomatic pause and tentative ceasefire. Despite the escalation, BlackRock’s weekly market commentary notes that the global economy has proven resilient. Today’s economy is far less oil-intensive than during past energy shocks, and the ongoing AI investment boom remains a powerful growth driver. The firm highlighted geopolitical risks and critical chokepoints as key forces shaping markets in its 2026 Midyear Global Outlook, and the latest escalation has brought those risks back to the fore.
Middle East Conflict and Oil Prices
The latest flare-up has pushed Brent crude prices 13% higher. However, BlackRock points out that the oil market is telling a more measured story. Futures curves suggest investors expect a temporary disruption rather than a prolonged supply shock. High starting oil inventories, demand adjustments, supportive fiscal policy, and ongoing AI-led investment have helped contain the shock without materially changing the global macroeconomic outlook so far.
BlackRock estimates the Middle East conflict will shave roughly 0.4% off global GDP in 2026, with about 0.3 percentage points already reflected in market pricing. Inflation presents a different challenge. The asset manager expects the conflict to add around 0.8 percentage points to global headline inflation. Europe and parts of Asia face greater exposure due to their reliance on energy imports. For instance, roughly 65% of South Korea’s oil imports and one-third of China’s LNG imports move through the Strait of Hormuz. The U.S. remains relatively insulated by its greater energy independence and exposure to the AI investment cycle.
AI Investment and the Tech Selloff
While geopolitical risks dominate headlines, equity markets are navigating their own turbulence. A sharp selloff in semiconductor stocks weighed on the broader market last week. The S&P 500 and Nasdaq fell 2% and 3% lower, respectively. The Philadelphia Semiconductor Index dropped 11% and briefly entered a bear market. This decline was driven by concerns that lower-cost large language models from China could challenge frontier models.
BlackRock views this market reaction as overstated. The firm argues that cheaper AI could broaden adoption and reinforce demand for AI infrastructure rather than diminish it. This perspective supports their broader preference for U.S. equities. Consensus now expects S&P 500 earnings to grow 25% in 2026, up from 18% just three months ago. BlackRock notes that higher interest rates do not automatically translate into weaker equity markets. Markets are currently pricing a higher path for U.S. policy rates, while long-term government bond yields reflect concern over persistent inflation. Yet, companies with pricing power can pass higher costs through to customers, supporting revenues and keeping earnings expectations high even as policy rates climb.
What Happens Next
Investors will closely watch this week’s UK inflation and PMI data, which will test BlackRock’s base case of resilient growth and moderating inflation. Market participants will also monitor global oil inventories, which have already been drawn down by about 0.5 billion barrels this year. This leaves roughly 0.5 billion barrels readily available to absorb further disruption.
BlackRock acknowledges that while the economy is more resilient, downside risks remain if tensions spread beyond the Strait of Hormuz to other key export routes like the Bab el-Mandeb Strait. However, the firm believes immutable economic laws will limit extreme outcomes. The knock-on effects of a prolonged energy supply disruption create economic and political pressures for de-escalation, leaving incentives for all sides to find an off-ramp. For now, BlackRock remains nimble and risk-on, prepared to adjust its stance as the facts and markets evolve.
— Maya Chen, business desk, AXO News