by Jurrien Timmer, Director of Global Macro at Fidelity Investments
It feels good to be back home in Boston after a month away. My flight from Vancouver was predictably late, causing me to spend the night at a Toronto airport hotel instead of sleeping in my own bed. But that’s part of the road warrior life so all good, especially after another successful event at the beautiful Vancouver Convention Centre. My wife joins me this week after successfully completing her 6th Iron Man, this time the world championship 70.3 in France. She does these events with little or no training, which boggles the mind.
Marketwise I didn’t miss that much while at Burning Man, but there’s lots happening now. Looking at the heat map below, we see that the market is only 2% off its highs, even though oil prices are soaring again and the 10-year yield is knocking on the 5% “red zone.” Let’s see if there’s a Bessent Put in the works.
The Fed meets this week, and the markets are demanding that it takes back the two misplaced rate cuts from last year. Real rates are now 2.59% while TIPS break-evens are 2.41% even though the inflation rate is 3.4% and commodity indices are at new all-time highs. Makes you wonder whether the market is too complacent or whether there is just no signal in the TIPS breaks.
For equities, the forward P/E ratio remains 16% below its highs while earnings are expected to grow 20% over the next 12 months. Either valuations just can’t keep up with this earnings explosion, or the market is reluctant to pay up for peak earning growth, or valuations are being compressed by a rising risk-free rate (aka the Fed Model). I think it’s a combination of all three. The US stock market is narrowing again, with only 39% of stocks trading above their 50-day moving average and 60% above their 200-day moving average.
Market cycle
Cyclically the now 45-month bull market remains intact, driven by earnings growth and margin expansion. It remains a global bull market with both EAFE and EM keeping close pace in USD terms but lagging in local currency terms.
Globally the landscape remains competitive in terms of the payout growth rate and payout ratio. There are plenty of fish in the sea, which is a good thing. Japan and Canada are the winners while EM lags.
In the US, earnings continue to soar, and the rate of change is still rising. Once the second derivative starts to decelerate, we can see how much tolerance there is for less stellar fundamentals, but the fact that the P/E ratio is already down 9% year-over-year and is only at 20x should provide some buffer.
The hot topic in Vancouver (and even on the playa) was the AI boom and whether it is cresting. I’m no expert on AI and trust that it will make us smarter rather than kill us, but in terms of the equities they have been dead money since early June, almost 4 months ago. Perhaps the bullish narrative is starting to drown in a rising tide of debt and equity capital. More on this below.
The semiconductor chart suggests that peak earnings growth is imminent. Perhaps this is why valuations are so reasonable and why prices are meandering. Investors are waiting for the shoe to drop.
In terms of sentiment, judging by ETF flows in the semiconductor space, the AI theme is becoming less crowded.
The secular wave
Moving from cyclical to secular, my big question for some time now is if when and why the secular bull market (which in my view started in 2009) might eventually end. What will be the catalyst? The end of the Mag 7’s reign? A rising cost of capital? A saturated market that struggles to adopt to a regime change from savings glut to supply glut?
The chart below shows that corporate debt issuance is on the rise just as the era of equity float shrinkage comes to end. For years we had a regime of debt arbitrage (from equity to debt) but now corporates are so hungry for capital that all the spigots are open. This comes at a time when the government is also borrowing and when the non-economic buyers of debt (central banks) have disappeared. This all suggests a rising cost of capital as supply outstrips demand for the first time in decades. A rising cost of capital suggests a lower P/E per the Fed model.
Exhibit A in the changing financial engineering dynamic is the Mag 7, whose payout ratio has plummeted to 28%. Yes, companies are supposed to invest their free cash in capex and not play it safe with buying back shares. But the ROI on buybacks is known while the ROI of capex is unknown. Uncertainty requires a higher risk premium in both the bond market and stock market, and we are seeing it play out in real time. The Mag 7 is revisiting its highs, which is keeping the S&P 500 index close to its peak levels, but notice below how the relative performance of the M7 peaked in line with the end of the buyback era. Since then, the relative price has diverged from the absolute price.
Here we see the payout growth rate and payout ratio for the Mag 7 against the equal-weighted S&P 500, value, financials, EAFE, and EM. The Mag 7 led this secular bull market from 2014 through 2025, but it looks to me like its reign has ended.
Rates & the Fed
On the rate side, there’s not much good to report, other than the likelihood that a larger Bessent Put might soon be activated if the 10-year yield surpasses 5.0%.
But this is more than a US story: other than China (which has a significant savings glut), long yields are rising around the world as central banks must turn hawkish again. A global bear steepener.
Various iterations of the Taylor Rule clearly show that those last two rate cuts from the Fed were premature and that they need to be reversed.
Commodities
Finally, the renewed flare-up in oil prices has taken the BCOM Spot index to new highs. But it’s not just oil. The chart below shows that 80% of the BCOMSP is in an uptrend.
The monthly chart shows that we remain in a secular bull market for commodities. This suggests that consumer inflation will remain sticky for some time, with the cost of capital to follow.
Gold has rebounded from its support at $4k and based on global liquidity and rising demand we could easily see $5k or higher in the coming months.
Finally, Bitcoin has been on the move after holding the $60k support zone for almost a year. That’s how long a typical Bitcoin winter lasts, so I’m sensing that a new 4-year cycle bull market is underway. Note that the Z-score of BTC/gold has turned positive after being -100%. In the past that has generally been confirmation of a bottom.
What does al the above suggest? We are in a new secular regime of a higher cost of capital, which suggests that governments will respond with that oldest trick in the book: financial repression.
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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