BlackRock, the world's largest asset manager, has upgraded its overall outlook for US stocks from neutral to overweight, citing cooling inflation and potential interest-rate cuts by the Federal Reserve. The firm believes that the upward momentum of the S&P 500 will continue over the next six to 12 months.

According to BlackRock's team of strategists led by Jean Boivin, head of the BlackRock Investment Institute, the stock market's tech-driven rally, fueled by investor excitement over artificial intelligence, is expected to "broaden out as inflation falls further, the Fed starts to cut rates, and the market sticks to its rosy macro outlook."

The strategists noted that the market is currently pricing a soft economic landing, anticipating inflation to fall to 2% without a recession. This narrative is expected to support the rally in the short term and allow it to expand beyond the tech sector.

The beginning of the new year has been promising for US stocks, with encouraging economic data such as strong GDP growth in the fourth quarter and falling inflation metrics. Additionally, the S&P 500 closed at a record high for the fifth consecutive trading day, the longest streak since November 2021. In the month of January so far, the S&P 500 has advanced 3.3%.

Despite the positive outlook, Boivin and his team remain cautious and prepared to adapt as market conditions may create uncertainties. They suggest that the consensus view of a soft landing for the US economy could be challenged later this year, and that inflation may experience a resurgence in the long term.

BlackRock agrees that inflation will fall near 2% this year, contributing to the upward momentum. However, they believe that inflation is unlikely to stay at that level in the long run, citing "too-hot" US wage growth that could make it difficult to maintain core inflation near the Fed's targeted 2% level. The strategists predict that inflation may reach 3% by 2025.

The S&P 500 closed higher on Monday, reaching another record high, as investors prepared for a busy week filled with the Federal Reserve's policy decision, earnings from mega-cap tech companies, and a crucial US employment report. The S&P 500 closed up 0.8% at 4,927.93, while the Dow Jones Industrial Average ended 0.6% higher and the Nasdaq Composite jumped over 1%, according to FactSet data.

BlackRock's decision to upgrade its outlook suggests optimism in the US stock market's performance, with expectations of potential rate cuts by the Federal Reserve. However, uncertainties remain, and the firm emphasizes the need to stay nimble and ready to pivot in response to changing market conditions.