by Jurrien Timmer, Director of Global Macro for Fidelity Management & Research Company
Things seem kind of chaotic out there as we keep lurching from one headline to the next. Yet the markets are doing what they always do: engaging in a relentless process of price discovery. Sometimes that process seems straightforward, when the incoming knowledge seems obvious and easily discounted (as it seemed to be last November). But at other times the news flow can be chunkier and more difficult to absorb, as the market tries to find its bearings while the ground is continuously shifting beneath our feet. The past few weeks have felt more like the latter. The result? The markets are churning without making much progress.
March Madness
It’s now March and the consensus trade at the start of 2025 has been all but forgotten. So much for the Red Wave Trade of a stronger dollar, higher rates, six figure Bitcoin, and US stocks dominating. Instead, we have European and Chinese stocks in the driver’s seat, followed by gold, TIPS and long Treasuries.
A Reshuffling of the Leaderboard
Bitcoin has quickly faded from first place to last (for now), along with momentum plays in general. We are only two months in, so who knows what will happen, but the action so far speaks to the old Wall Street adage that “whenever something seems obvious, it’s obviously wrong.”
Shaking the Bitcoin Tree
With the momentum trade in reverse, Bitcoin has corrected back to about $85k. Judging by open interest and ETP flows, this seems to be mostly caused by tourists who jumped on the momentum train last November.
When the price action gets noisy and volatile, it’s always good to return to the fundamentals of valuation. For Bitcoin that’s an imperfect process to say the least, but based on my favorite two approaches (internet S-curve and power law curve), we seem to be right in the middle of the path.
Welcome to Middle Age
With another month under our belt, the cyclical bull market for equities is now 28 months old, knocking on the door of middle age. The median bull market over the past 100 years has lasted 30 months for a 90% price gain, but as you can see from the chart below, there is a large dispersion around that median (as is the case with almost all financial and economic variables).
Median Bull
So far, the S&P 500 has notched a 78% price gain since the 2022 low. That’s still below the average but in line with past cycles in which rising rates restrained equity prices. Meanwhile, the narrow leadership has gotten slightly less narrow, with 40% of the index outperforming on a year-over-year basis (up from 26% in 2023).
Soft Landing Playbook
The market has followed the soft landing playbook to a tee since 2022, but there is now a fork in the road as to whether the market follows the post-1994 playbook or the two soft landings that preceded it (1966 and 2016).
Churn
Again, “churn” seems to be the best way to describe the current price action. While the cap-weighted S&P 500 index remains in a well-defined uptrend, only 62% of the index are actually participating in that uptrend.
The equal-weighted index has not made a new high since November and continues to churn in a sideways pattern. Only half of the index is above their 50-day moving average.
Small Caps
Meanwhile, small caps are now making lower highs and lower lows on the daily chart. The best thing I can say here is that the index may be finishing a corrective A-B-C pattern to the downside. This is a far cry from the US-centric broadening playbook a few months ago.
The Mega Growers
Even the mighty Mag 7 is correcting from its last high, set in December 2024. Here too, the glass-half-full case is that the index has reached a measured move target to the downside. So maybe the correction is already over, or at least getting more mature.
Sentiment
Another reason to take a glass-half-full approach is that some sentiment measures now show a lot of concern among investors. The AAII survey (American Association of Individual Investors) tends to be noisy, per the chart below, but still, the jump to 61% bears is noteworthy.
The Action is Overseas
The only charts that show decent price momentum are Europe and China. The MSCI Europe index is still in breakout mode, with more than 70% of European stocks in uptrends. This part of the world has been left for dead for many years, and it is making a comeback.
ACWI ex-US
Europe is definitely standing out right now, as far as non-US equities are concerned. Below we see that the MSCI ACWI ex-US index is still below its 2021 peak, with only 57% of stocks in uptrends. In other words, global asset allocators need to be selective.
China
Chinese stocks are also being rediscovered, with both earnings and valuations now contributing to what may turn out to be a large basing pattern for the MSCI China index.
Jaws
The valuation “jaws” between the US and ex-US continue to be wide open, and for the most part this seems justified on the basis of long-term earnings growth and payouts. But that gap can act as an amplifier when the mean reversion trade kicks in.
No More Valuation Tailwinds for US Stocks
The rediscovery of European stocks is happening while US investors are no longer rewarding domestic stocks with higher P/E multiples. Below we see that while the earnings side continues to contribute nicely to equity returns, the market is getting little to no help anymore from expanding multiples. The P/E ratio is still up 6% year-over-year, but that is far less than the 29% gain a few months ago.
Fortunately, the earnings side of the house is carrying its weight, following a 14% growth rate for Q4 earnings. The 2025 estimate is coming down (as it often does) but is still showing 10% expected growth.
The Path Forward
Where do we go from here? Clearly a selective global mean reversion trade of some magnitude is underway. Whether this is the “big one” or just a quick trade remains to be seen. But, with the US no longer being rewarded with higher P/E’s (which have amplified an already robust earnings cycle), while Europe and China have woken up after having been declared all but uninvestable, something seems afoot.
For me, the main question has been whether this rotation can happen in an up market. Can US and global beta be positive while a global rotation occurs? The jury is out, but my guess is that it can happen only in a churning market, like we are seeing today.
The Economic Cycle
Part of the narrative will surely rest on the strength of the US economic cycle. Will it be robust following the return of Red Wave animal spirits, or is there a short-term cost to all the disruption in Washington? One key indicator on the disruption front is jobless claims, which jumped to 242k last week. This in turn is affecting bond yields, the dollar, and expectations for the Fed.
The Fed
The forward curve ticked down last week and now suggests a terminal rate of 3.56%, despite the fact that shorter-term TIPS break-evens have risen towards 3%. I still expect the Fed to be done easing, now that it has approached the neutral zone.
The Dollar
A very big question for the global rotation trade is the dollar. So far, it has weakened in line with the timing of the 2017 cycle, when President Trump was in year one of his first term. The administration seems to want lower interest rates and a weaker dollar, both of which are happening at this time.
This information is provided for educational purposes only and is not a recommendation or an offer or solicitation to buy or sell any security or for any investment advisory service. The views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Opinions discussed are those of the individual contributor, are subject to change, and do not necessarily represent the views of Fidelity. Fidelity does not assume any duty to update any of the information.
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