by Jurrien Timmer, Director of Global Macro for Fidelity Management & Research Company
The view from above.
Another week, another headline bombshell. Such has been the norm during the past year or so. But charts are charts, and there is a lot we can learn from them in order to optimize the signal-to-noise ratio.
What do we know? The cyclical and secular bull market is intact but showing its age. Cyclically the slope of this 100% bull market is flattening as the market rotates from the AI leaders to the “picks & shovels” stocks and the downstream beneficiaries. So far, the broadening has been benign, which is good to see. Earnings appear to be driving the bus and US valuations are rich but I believe justified by robust earnings growth, tight credit spreads, and growing margins. Globally the bull has broadened as well, with both EAFE and EM equities benefitting from a combination of stronger payout growth and lower valuations. Both the dollar and bond market remain eerily quiet as we wait to see how the fiscal dominance narrative will unfold once the Warsh Fed gets going and a new Treasury-Fed accord (of sorts) gets underway. Finally, gold has been taking a bullish breather while Bitcoin is trying to find a floor. All this and more in this week’s WAAR.
Catching up
The broad market continues to catch up to the mega caps without threatening the bull market. It’s a fine needle to thread but we are doing it. Since the tariff tantrum last April, the cap-weighted S&P 500 is up 40% and the equal-weighted index is up 35%. The gap is closing, which is a win for both active and passive investors. Concentration risk is important, as previous Nifty Fifty cycles have shown.
Benign broadening
The chart below shows that the equal-weighted S&P 500 has outperformed the Mag 7 by 12% over the past 3 months. The last time that happened was in the fall of 2024, and the time before was the spring of 2021. Since the Mag 7 started dominating the scene, bullish broadenings have been rare, with most periods of equal-weight outperformance occurring in down markets.
Can the Mag 7 hold on?
Whether this benign broadening will continue depends largely on whether the Mag 7 can hold on to its trading range. So far it has, but should support be taken out at the range lows I could easily see another 10% decline for this cohort. It would take a lot of bullish price action in the broader market to keep the S&P 500 cap-weighted index from falling if the M7 declines a lot further.
Earnings are driving the bus
The earnings picture has continued to provide support for this now 40-month old bull market. With Q4 earnings season soon wrapping up (with 425 companies having reported), 75% have beaten estimates by an average of 773 bps. The dollar estimate has improved by $4, which is similar to the past few quarters.
With valuations taking a back seat to earnings, the P/E ratio for the S&P 500 hasn’t moved much in recent months. This has allowed equities to grow into their multiples.
Valuations are high but justified by fundamentals. At a 3.9% implied equity risk premium (iERP), the market is certainly not cheap, but once we normalize for tight credit spreads and growing margins, the valuation picture seems justified.
Capex boom
Companies are spending more of their revenues on capex, and so far, this hasn’t come at the expense of either dividends or buybacks. At the bottom in 2022, companies were spending 5.4% of their revenues on capex, and that has now grown to 7.1%. It doesn’t seem that much except that revenues per share have increased from $1,326 to $1,948. That means that capex-per-share has doubled since the bull market started 40 months ago.
Sentiment
Back in October the question of the day was whether the AI boom was turning into a bubble. Today that question seems like a distant memory, with the various speculative AI themes treading water instead of going vertical.
The lack of speculative spirits can also be seen in the call/put ratio, which at 1.13x is far from enthusiastic levels.
On the other hand, investor flows have continued to be robust for both equities and bonds, suggesting that long term investors are comfortable with the investing landscape.
Global convergence
Beyond the broadening in the US market, globally the pie continues to get larger. EM equities have been on fire and have dominated the leaderboard along with other international regions.
Global earnings at a glance
One way to visualize the global earnings convergence is by showing earnings estimates for the different regions on a log scale. All estimates are rising but EM estimates are rising the fastest.
Shown another way, EM estimates are now rising at a 31% year-over-year rate, almost double that of the US and EAFE.
And EM prices have of course followed, although it should be pointed out that the Z-Score for the MSCI EM index (blue bars) has now reached fairly lofty levels (seen at previous highs). The CRB Raw industrials Z-Score (orange) has not improved nearly as much, which makes me wonder if a commodity exposure might be a good (partial) substitute going forward.
Indeed, both commodities and their related equities have continued to show excellent price action.
Can the Fed ease further?
Despite some hawkish-sounding Fed minutes last week, the forward curve continues to suggest that the Fed will normalize policy further towards 3% in the coming year or so. If the TIPS break-evens are right in suggesting that inflation will be 2.6%, that would suggest that either the market thinks that R* is less than the official estimates of 1.5%, or the Fed will dip into accommodative territory at a time when inflation is above target and the economy is growing beyond potential.
Indeed, even the more dovish interpretations of the Taylor Rule below (using the TIPS curve instead of headline inflation data) suggests that the Fed is already more accommodative than justified.
If the Fed (soon to be under new leadership and presumably working closer with Treasury) choses to plow ahead with more rate cuts anyway, we will have to watch both the long end of the yield curve and the dollar for signs that the Fed is making a policy error. So far, the price action has been a big yawn on both fronts. Perhaps the old mantra of “don’t fight the Fed” has been replaced with “don’t short Scott Bessent.”
Gold & Bitcoin
Despite some big volatility and a 21% drawdown earlier this month, gold has hung in there and done exactly what one would expect in a bull market (produce sharp but short-lived drawdowns which quickly find new buyers). Gold may be the ultimate hard money asset and it has been following the global money supply in lockstep.
Bitcoin is thought to be the same, but as the chart shows below, its price action vis-à-vis global liquidity has been a lot choppier than gold.
Why? The simple reason (in my view at least) is that while gold is one thing and one thing only (hard money), Bitcoin is several things. Aspirational hard money is one of them, but there is no denying that Bitcoin is also a speculative asset. In the chart below, when we add the rate of change of the software/SaaS index to the growth rate of the money supply, we can see that the liquidity narrative can easily be overwhelmed by speculation. When liquidity is growing and speculation is robust, the bullish narrative has been amplified into a powerful bull market. But the opposite is also true. Right now, we have ample liquidity growth but a bear market in speculation. The result: Bitcoin is languishing while gold and the money supply are rallying.
A new narrative for Bitcoin
It has been my view all along that Bitcoin is an aspirational junior player on the hard money team (led by gold), and not the end-all-be-all store of value that is going to “eat” all other asset classes. Gold has been and, in my view, will always be the quarterback on this team, and Bitcoin along with silver are secondary plays. As such, they may take turns leading the ups and downs, and just like we look at the gold/silver ratio (or the gold/miners ratio) we could consider the gold/Bitcoin ratio. To me, that’s the lens through which we should evaluate Bitcoin.
In fact, there may be a valuable indicator lurking here as we ponder when and where Bitcoin will find its floor. The chart below shows Bitcoin and its power law curve. We can see that the $60k level is a support level based on previous highs and lows as well as where the power law support curve is (or will be after a few months of backing and filling). Now look at the bottom panel. This shows the Z-score of the gold/silver ratio (blue) as well as the gold/Bitcoin ratio (orange). While gold is “cheap” compared to silver, it’s “expensive” compared to Bitcoin. We are not quite at the extremes seen at previous inflection points but we are getting close.
It gets better. Taking a close-up look below, we can also see that the gold/Bitcoin Z-score has produced valuable divergences at past extremes. At both the 2021 and 2025 tops, the Z-score triggered a bearish divergence at the new Bitcoin highs, and it flashed a bullish divergence at the 2022 low.
We don’t have such divergence yet, plus at 91% the signal itself is not yet at the extremes seen at past lows. This suggests to me that Bitcoin will need to spend more time backing and potentially filling at the $60-$70k level, and perhaps even slightly undercut it, to satisfy both the time and price elements of a mild Bitcoin winter.
Speaking of winter, good luck out there!
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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