BlackRock's Gargi Chaudhuri shares how to invest as ETF inflows soar to records ahead of a promising 2025

• ETF inflows have taken off in the last week or so, as have stocks.
• Strategists, including BlackRock's Gargi Chaudhuri, are optimistic about the economy.

Investors have poured money into the market at an unprecedented pace since Donald Trump's victory, though a veteran investment chief believes there's much more than politics at play.

Inflows into exchange-traded funds (ETFs) have shattered the record set in 2021 with more than a month and a half to spare, according to asset management titan BlackRock. The world's largest ETF issuer recently noted that $77 billion went into ETFs in the week after the election, which had never happened before. That surge coincided with the S&P 500's best week of 2024.

Markets were especially euphoric immediately after election day. An astounding $22.3 billion went into US ETFs last Wednesday, and BlackRock's uber-popular iShares Russell 2000 ETF (IWM) had its most active day of trading and inflows since 2007 as small caps soared by 5.8%.

However, BlackRock's Gargi Chaudhuri doesn't think President-elect Trump deserves all the credit for this astounding market rally. The chief investment and portfolio strategist, Americas noted in a recent interview that US stocks had several strong catalysts before Trump's win.

"Obviously, there have been some pretty sharp movements over the course of the last week," Chaudhuri told Business Insider. "But even as we look back to the quarter before that or since the beginning of this year, I think there have been some very solid fundamentals that have underpinned this movement."

Robust growth for the economy and corporate earnings are some of the most salient market drivers, as are lower interest rates and receding inflation, Chaudhuri said. End-of-year rallies are also very common, especially in strong years for the market, as Truist recently remarked.

Another convincing explanation for this recent market momentum is that investors had reduced risk as uncertainty mounted ahead of the election before quickly changing course when they got clarity on the path forward sooner and more decisively than anticipated.

"Investors bringing down their portfolio risk going into elections was perhaps one of the reasons that we have seen this pretty strong re-risking in markets, especially after we got the election results," Chaudhuri said.

Why softer economic readings are a red herring

As the new year approaches, Chaudhuri is rather confident about the US economy, even though a few recent developments seem to have given the glass-half-empty camp some ammunition.

GDP growth and job additions have slipped lately, though neither is a major cause for concern for Chaudhuri. The economy didn't expand as much as expected in the third quarter, but GDP still rose at a healthy clip of 2.8%. And a weak October jobs figure appears to be largely due to the severe weather events that disrupted thousands of workers.

Besides, more modest growth is a sign that the economy isn't overheating, which is welcome news to the Federal Reserve in its quest to ease financial conditions without reviving inflation. Such moderations aren't giving Chaudhuri pause about the trajectory of the US economy.

"It would be very normal for us to continue to see a further normalization in the labor market, given how strong the economy has already been, how high rates are," Chaudhuri said.

The investment chief added: "We haven't really seen that job destruction taking place quite yet. You're still seeing wages rising; you're not seeing layoffs pick up in a meaningful manner."

Corporate earnings growth is arguably the most compelling reason to stick with US stocks following what's been another outstanding performance this year. Profits jumped about 7% in the third quarter, which is well above the mid-single-digit figure that analysts were banking on.

"One of the things that the equity market has done over and over again is continue to surprise us in terms of earnings growth," Chaudhuri said. "I think companies have continued to find very innovative ways to manage their expenses. They've found a way, especially given the spend on AI, the type of CapEx that's going into finding ways to make companies have more productivity."

Where to invest in a rosy 2025

Two sectors with abnormally strong earnings prospects are financials and industrials, Chaudhuri said. These economically sensitive groups enjoyed some of the larger post-election pops as Wall Street puts its chips on sectors that should benefit from a hot economy.

And although smaller stocks have been on a heater, Chaudhuri believes that large, undervalued companies are the better place to be, given their superior earnings setup.

"For a longer period of time, large cap is where we think the earnings growth is going to continue to be higher and better," Chaudhuri said.

While earnings may not be under the microscope like they were when interest rates were at their peak, they're still top of mind for Chaudhuri. Larger stocks often have better earnings than their smaller peers, and the investment chief thinks that the cream will eventually rise to the top.

"This catch-up trade that's happening in small caps right now has a little bit of legs," Chaudhuri said. "I think that can continue, maybe 'til the end of this month or even the end of next month."

Chaudhuri continued: "But for us to believe in sustained rallies in small caps, we would need to see earnings growth, and over 50% of the small-cap index still is not very profitable."