From a report by the BlackRock Investment Institute and Chief Investment Officer Rick Rieder.

- Short-term Treasuries: upgraded from underweight to overweight

- Long-term Treasuries: upgraded from underweight to neutral

- U.S. equities: downgraded from long-term overweight to neutral

BlackRock said it remains bullish on AI and described the stock downgrade as short-term risk management: “We are managing near-term risks, not changing our core convictions.” This week, BlackRock closed out its U.S. equity overweight position, which it had held for several years, and moved to neutral, using the money freed up to buy short-term U.S. Treasuries. It didn’t say AI was going nowhere; the report also said, “Our conviction in AI fundamentals is unchanged, and we still prefer AI within U.S. equities.” What it’s concerned about is interest rates: the 10-year Treasury yield has risen 110 basis points this year to around 5.25%. You can earn more than 5% just by holding Treasuries and doing nothing.

“Overweight” and “neutral” are terms used in asset allocation: overweight means holding more than the standard allocation, while neutral means returning to the standard allocation. So this is a reduction in positions, but it’s a long way from being bearish. BlackRock itself calls it “short-term risk management” and says it will add risk back when it sees better opportunities.

What matters more to me is the reasoning behind it: It says that as interest rates rise, companies will be sorted again according to whether they can earn back their cost of capital.

AI infrastructure is one of the most capital-intensive undertakings in history: data centers, chips, electricity—all of it takes a lot of money, much of it borrowed. When government bonds are yielding 5%, if a project can only earn 6% or 7%, why would investors take that risk? On Monday, Broadcom CEO Hock Tan said that money is the biggest constraint on AI development. He was talking about the same calculation.

One more detail: The market has already priced in another 160 basis points of Fed rate hikes over the next 12 months this year. BlackRock thinks that’s too much, so it’s heavily weighted toward the short end, while long-term bonds are back to neutral. Next up, we’ll see this week’s CPI and PPI data. If inflation remains stubborn and rate-hike expectations keep rising, the first investments to be reassessed will be AI projects that rely on borrowing to expand and haven’t started making money yet.