by Jurrien Timmer, Director of Global Macro for Fidelity Management & Research Company
Commodities could well become one of the winners in a multi-sphere world. As the chart below illustrates, commodities are one of the least correlated assets (to equities or bonds), and could serve as a good diversifier.
It’s only January 11 but a lot is already happening as we kick off 2026.
The developments in Venezuela and speculation around Greenland are creating a narrative around an evolving multipolar world. Has the postwar era ended and we are back to 19th century colonialism?. Is the world being divided into three spheres of influence, dominated by the US (western hemisphere), China (Southeast Asia, South Asia, and Africa), and Russia (Near Abroad, Eurasia)? What happens to Western Europe in this scenario? Ukraine? Taiwan? Is this what the bull market in gold has been telling us for several years already? Other than gold, who are the winners and losers? Is this finally the moment for commodities to emerge as a strategic asset class? Will the mega caps get even more magnificent if the US joins China in sponsoring national champions?
Meanwhile, global growth seems to be gaining momentum as the stock market broadens out in a positive way (without taking down the mega caps). GDP estimates as well as corporate earnings are on the rise, even though the employment picture remains soft. Is this the AI dividend at work, moving downstream from the hyper-scalers to the broader economy? It looks that way.
Finally, earnings growth (as measured by the 5-year annualized growth rate) has now reached peak cycle levels (14%). That growth rate has capped every earnings growth cycle since the 1950’s. What happens next, and do today’s top valuations play a role?
All this and more in this week’s WAAR.
What a start
The new year is off to a good start, with major equity markets advancing in the first week of January and doing so in the best way possible (with strong breadth). For the global stock market, the MSCI ACWI index has printed new highs after a few months of consolidation, with 71% of global equities above their 200-day moving average.
For US equities, the market is broadening from the Mag 7 to the rest of the market, and it has been doing so without taking down the cap-weighted index. This is good to see, given the risk that the top heaviness of the S&P 500 could create a zero-sum dynamic in which the market broadens at the expense of the mega caps and therefore the index itself.
The chart of the Mag 7 illustrates this favorable dynamic. The Mag 7 have been treading water since November, while the broader market has gone from weak to strong. Just 2 months ago only 32% of the index was above its 50-day moving average. Today it’s 71%. This is the best possible income in terms of rotation. Let’s hope it sticks.
Earnings
Last year’s 18% gain in the S&P 500 was driven largely by earnings growth, with the 2025 calendar year estimate roundtripping from a 12% growth rate at the beginning of the year to 7% following the tariff tantrum and back up to 12% currently. The 2026 estimate is starting out at +15%.
The last quarter of 2025 will start getting reported in a week or so, and by the looks of it (below), Q4 is looking a lot like Q3. If that holds, we could see another double-digit quarter, pushing the 2025 growth rate up even further.
And it’s not just US earnings that have been accelerating. For international equities earnings estimates have been growing even faster than in the US, in the process driving a significant performance boost. Non-US equities are now outperforming the US by 15 percentage points (year-over-year) after underperforming by a like amount in 2024.
Run it hot
Despite ongoing soft employment data, there seems to be an upswing underway in the global economy. Per Bloomberg, GDP estimates for the US are on the rise.
And earnings growth has accelerated despite some ongoing deterioration in “excess labor demand” per the JOLTS report.
One explanation for the divergence between labor, growth, and earnings, could be that the AI dividend is really happening and going downstream from the creators of AI to the beneficiaries. Is that what we are seeing here with the market’s rotation and growth spurt?
Commodities
Globally, the CRB Raw industrials index has been moving higher, which is typically a sign of improving economic conditions. The MSCI EM index is following in lockstep, finally besting its 2021 high.
Commodities could well become one of the winners in a multi-sphere world. As the chart below illustrates, commodities are one of the least correlated assets (to equities or bonds), and could serve as a good diversifier.
The chart below is a technician’s dream, with a long base turning into an uptrend, with confirmation coming from the commodity-sensitive equities.
Commodities have long been due for a secular upswing, and their 10-year CAGR has advanced from negative to positive in recent years.
Bonds are asleep
The bond market hasn’t seemed too bothered by the run-it-hot sentiment, and the 10-year yield has remained ever so quiet at 4.17%. The market seems resigned to the premise that the 2026 Fed will become more dovish as the leadership evolves in the coming months, and that the Treasury Secretary will continue to manage the debt supply like a master puppeteer.
Or the bond market agrees with the benign equity broadening and is concluding that the AI revolution has slayed the inflation dragon. The Truflation index, which is admittedly volatile but correlated to the CPI and PCE, has plummeted to a 1.9% annual rate in recent weeks.
Nifty 50
Despite valuations being in the upper percentiles historically, the spread between the 50 largest stocks (the Nifty Fifty) and the rest of the market remains well below the extremes seen back in the early 1970’s and the late 1990’s. Perhaps this is why the above-mentioned rotation has been fairly benign.
The Nifty Fifty now comprise 65% of the overall market cap. This is well above the 2000 extreme and at the level seen in the 1960’s and early 1970’s. If the world order is consolidating into spheres of influence, state capitalism and national champions will likely be the order of the day. That suggests that the current level of concentration could be here to stay and that concentration risk is perhaps overstated.
Here’s another look at concentration. While the late 1990’s mega cap dominance led to a swift mean reversion (and a 53% bear market), that same dominance persisted for a very long time during the 1930’s, 1940’s 1950’s and 1960’s.
Peak earnings? Peak valuation?
The chart below from last week’s report shows that we have reached peak earnings growth while valuations have been at an all-time high. What does this mean if anything? Let’s explore.
If we take the past century worth of earnings and valuation data, we get the following distributions. On the left is the 5-year EPS CAGR and on the right is the P/E ratio. As we can see below, the market is on the right tail for both the earnings cycle and valuations. It kind of looks ominous, or is it?
On the one hand we have two right tails, which might suggest a return to the middle or even the left tail. On the other hand, it makes sense that if earnings growth is on the right tail, that the market in its infinite wisdom prices that in through an elevated P/E multiple. That’s how the DCF math works.
Let’s look at the underlying cycles. The next chart highlights the various earnings growth peaks going back to the 1950’s. I have the data further back than that, but those additional cycle peaks (1926, 1936, and 1951) were quite extreme. The bars below show the current cycle, with estimates for the next 5 quarters (from BBG). Currently the 5-year CAGR is at 14%, which is generally where most cycles peak. In fact, the consensus estimates (if they are right) confirm that we are indeed at peak earnings growth, with EPS growth decelerating to 9% by the end of 2026. Past growth peaks that look somewhat similar are 2007, 2014, 1997, 2021, and 1966.
Peak earnings growth and peak earnings are not always the same thing. Current estimates, suggest earnings could continue to advance higher by 17% over the next 5 quarters. If true, that will be the strongest continuation of earnings growth following a peak ever. Only the 1997 growth peak comes close.
Now let’s look at the valuation side. At 32.5x, the 5-year CAPE ratio is the second highest ever at an earnings growth peak, bested ever so slightly by the late 2021 growth peak (which followed the COVID rebound). That cycle turned south in early 2022 when rates rose. Valuations were higher in 2000, but that was 3 years after the growth peak.
If we put the two variables together in a scatter plot, we get the chart below. In it I have highlighted the major cycles above. Again, with the more extreme cycles omitted (1926, 1937, 1951), the pattern is tight. Once the earnings growth peak is in, the squiggly lines generally track from upper right to lower left, suggesting that earnings growth tapers off (by definition) while valuations recede. The major outlier is the 1997 growth peak. From that point, following the 1998 LTCM correction, valuations soared into the 2000 bubble peak, before collapsing when the bubble burst.
The next chart shows the S&P 500 following these growth peaks. As you can see, the chart is all over the place, indicating that there is no easy answer to the question of what happens after an earnings growth peak. Context is everything, including here. If a growth peak leads to a decline in the level of EPS (2007), the market generally goes down. If it only leads to a deceleration (2014, 2018, 1966, 1997), the market generally can continue to advance.
Interestingly, both the 1966 and 1997 growth peaks happened 2-3 years before the end of a secular bull market (1968 and 2000). That’s an interesting analog given that in my view the current secular bull market is in its final innings.
In any case, what this study suggests is that growth peaks followed by decelerations and not contractions do not necessarily have to stop or even slow a bull market for at least a few years, regardless of valuations. The exception on that front was the 2021 peak, when rising rates met sky high valuations, which led to a 28% bear without any loss of earnings.
My conclusion: it comes down to earnings and interest rates, as always. If earnings continue to grow (as seems likely), even at a slower pace and high valuations, and bond yields remain benign (below 4.5%), then this bull can keep charging a little while longer.
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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