Jurrien Timmer: Green Over Red

by Jurrien Timmer, Director of Global Macro, Fidelity Management & Research Company

The tortoise and the hare

It was another eventful week with lots of gyrations around the theme of AI winners and losers, as well as a massive purge in the precious metals and crypto space.  But beneath these headlines the broad market continued to broaden in the best way possible.  The result: on Friday the Dow reached the 50k milestone while many of us were focused on Bitcoin and the fate of the SaaS stocks.

Milestones

Of course, 50k is just a round number, but like birthdays and anniversaries they make us pause and pay tribute to life’s inextricable growth path.

Bullish broadening

While the Mag 7 have gone nowhere since October, the rest of the market is catching up without any price damage to the overall index.  It’s a good outcome and far better than the zero-sum kind that I feared last year in which the Mag 7 might decline sharply and drag the index with it.  That could change, of course, but for now we are having our cake and eating it too.  The chart below illustrates the M7’s holding pattern.  Hopefully, it’s not a distribution top like we experienced a year ago.

Global broadening

Not only are the S&P 493 catching up but so are markets around the world.  The cosmic scatter plot chart below tracks the S&P 500 nominal index on the x-axis against its real index (along with a variety of global indices) on the y-axis. An index above the horizontal axis means that it has outpaced inflation since 2020. The size of the bubbles shows the correlation to the S&P 500.  The Mag 7 are so far ahead that it will take a lot to catch up, but it appears to be happening.

Q4 Earnings Season

With 291 companies reporting, 79% are beating estimates by an average of 826 bps.  The Q4 dollar estimate has now bounced $4, which is in line with the result of the past few quarters.  This shows that the earnings momentum which began in late 2023 has continued.

Whether it’s due to AI or OBBBA or both, the momentum is palpable.  The 2026 and 2027 estimates have continued to rise at a 14-15% clip, which is also where the trailing 5-year CAGR is.

Valuation

This formidable earnings growth has allowed valuations to take a back seat for a change. While the 5-year CAPE ratio is up there at 32x, the n12m P/E multiple doesn’t seem too onerous at 22x, considering not only the earnings momentum mentioned above but also the level of credit spreads and margins.  When normalizing the equity risk premium against these two macro variables my DCF math suggests that the market is 10% too high, but nothing like the bubble days of the late 1990’s.  We appear to be in a boom but not a bubble.

Global earnings momentum

The earnings boom has gone global, with estimates in both EAFE and EM showing good momentum.  The blue squiggles show estimates for the S&P 500 and the pink ones are for the MSCI EAFE index.  The days of significant divergences are over for now.  The black line with the yellow trend channel suggests that the long standing relative uptrend for the S&P 500 against EAFE has been broken.  That suggests a multi-year period of global broadening.  If so, it will be a valuable antidote to concentration risk.

Payouts drive the DCF math

And it’s not just global earnings that have been showing momentum.  Payouts (dividends + buybacks) have been advancing as well, as companies near and far have become more shareholder savvy.  The growth rate of payouts has been the primary driver of the DCF model (the numerator), and the chart below (showing the 5-year CAGR) illustrates that the US is no longer the only game in town.

Sentiment

Sentiment in the stock market appears somewhat mixed.  The Investors Intelligence survey (below) does show that the percentage of bulls is near the historical highs (62) while the percent bears is near the low (15).

However, that level of enthusiasm is not evident in the call/put ratio (not shown) nor in the price of speculative stocks (below).

Monetary policy

Things have been quiet on the rate side, with the 10-year yield trading at around 4 ¼ percent and expectations for a few more rate cuts (down to 3.1%) holding firm.  We will likely soon have a lot more coordination between the Fed and Treasury, with the Bessent-Warsh duo coordinating on monetary and fiscal policy as the Treasury tries to digest the $5 trillion OBBBA while also “democratizing” the Fed’s balance sheet so that it’s not just the capital owners who benefit from financial repression.

Steepener

How might the Fed/Treasury do that?  One possibility is to cut short rates to steepen the yield curve, and deregulate the banks into buying the long end so that the Fed’s balance sheet can be “privatized.”  If those QE assets transfer from the Fed’s balance sheet to the banks, presumably the multiplier effect will transfer from Wall Street to Main Street.

The USD

What this level of coordination will mean for the dollar remains to be seen, but my sense is that this subtle expression of fiscal dominance will be a negative.  While the bearish trade is obvious and well subscribed (judging by sentiment levels), the trend remains firmly down per the blue regression channel below.  However, the new cycle low for the DXY at 95.6 two weeks ago did get rejected, so for now the new lower range is holding.

Commodities

The commodities complex got caught in the crossfire of the precious metals margin call last week, but the chart of the Bloomberg commodity spot index remains solid.  With gold already bouncing, I suspect we will see new highs soon enough.

Diversifiers

Commodities have become a strategic asset in this increasingly multi-polar world, and both gold and the broader commodity index remain appealing diversifiers in a 60/40 (make that 60/20/20) portfolio.  The chart below is similar to the scatter plot above, but this time I show commodities against the S&P 500.  It highlights silver’s recent moon shot until it almost “kissed” Bitcoin.

Gold

While both silver and Bitcoin took it on the chin last week (at least until Friday), gold held in like a champ.  Per the chart below, while gold did drop about $1,200/oz in the span of two weeks, it held trendline support and has continued to oscillate around an ever expanding global money supply.  The uptrend seems intact and now also refreshed after the margin calls.

Bitcoin

Finally, Bitcoin fell to $60k last week, which is in the support zone that I suggested a few months ago when I wrote that another 4-year cycle bull market had likely ended.

A decline to “only” $60k would be relatively shallow for a Bitcoin winter, but as the commodity currency matures, its ups and downs should become less dramatic. It’s anyone’s guess whether $60k is the low, but my guess is that it is, and that after a few months of backing and filling the next cyclical bull market will get underway.  Based on the mathematical harmony of past cycles, which of course are not a guarantee of future cycles, my sense is that any future waves could eventually take us to new highs.

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