by Jurrien Timmer, Director of Global Macro for Fidelity Management & Research Company
The View from Europe
My five-country roadshow through Europe is coming to an end, and as always, as much as it is in my DNA to travel and explore, I am always very happy to return home in Boston. My bed, kitchen, road bike, and Boston University’s 25 meter competition pool are beckoning.
Thanks to my gracious hosts, I had many great conversations with CIOs, portfolio managers, corporate Treasurers, and investment advisors in Zurich, London, Paris, Frankfurt, and Hamburg. Like my visit to Vancouver a few weeks earlier, the zeitgeist among international decision makers was palpable.
What’s the playbook at this time of great uncertainty when the ground beneath our feet seems to be constantly shifting? Is the US becoming less exceptional and will US assets of all stripes (equities, debt, and the dollar) lose some of their longstanding (and well deserved) supremacy premium? If so, where do we invest instead? If the US stops being the world’s cleanest dirty shirt, where do we go in this era of fiscal dominance?
And now that the S&P 500 index, MSCI ACWI, MSCI EAFE, and MSCI ACWI ex-US are all at new all-time highs, does that mean that a new bull market cycle is underway, or was that short-lived but unsettling 21% drawdown in April just a bear scare that will only serve to extend the magnitude and breadth of the bull market that started in October 2022?
If the bull continues, what will be the catalyst? With US large caps back at the old highs in both price and valuation, while earnings estimates have been haircut, another up leg would need to be driven by a re-acceleration in earnings growth or even higher P/E’s. Perhaps the prospect of another fiscal boom driven by the $5 trillion Big Beautiful Bill will cause a melt-up for US equities.
But will that fiscal boom come at the expense of the US dollar? And at what point do the bond vigilantes push the 10-year back to a 5-handle? The market is now unchanged from its peak in February, but the same can hardly be said about the world around us.
On the other side of the pond, institutional investors in Germany were skeptical that the new fiscal push underway in Germany will be big enough, fast enough, and inclusive enough for private capital to really move the needle. It seems like US investors are more enthusiastic about Europe’s NATO-led renaissance than the Europeans. And emerging markets remain bifurcated, with China acting like deep value and India acting like the Mag 7. It all leaves the global equity market without an obvious new leader.
The Bull, Continued
With the S&P 500 at a new all-time high, my outlook for a trading range is starting to look more and more premature (i.e., wrong). But we will see, the V could still turn into an M, but at this point I have no choice but to give the benefit of the doubt to the bulls.
Equities gained some clear momentum last week, with tech leading the way to new highs, along with financials and industrials (all beneficiaries of a fiscal boom or deregulation).
V is for V-shaped
In terms of the speed of the recovery from April’s 21% drawdown, the market is in rarified territory, matched only by the 1998 recovery (from LTCM) and the 2018 Powell Pivot.
Mag 7 in Charge
Mega caps are driving the bus again, outperforming the equal-weighted S&P 500 by 19% over the past 3 months.
Head-and-Shoulders?
The S&P 500 equal-weighted index remains below its all-time high, and the market’s breadth remains unimpressive with only 56% of stocks above their 200-day moving average and only 10% of stocks sporting strong momentum (i.e., an RSI above 70). But that V-shaped bottom in the SPW is starting to look like an inverse head-and-shoulders bottom.
Trend, Earnings & Valuation
In terms of fundamentals, the picture remains mixed. The index remains firmly in its rising channel, is back above its trendline but not as extended as it was in February. Meanwhile, earnings growth is holding steady at 7% and valuations are back towards the highs.
Earnings Mark-Up?
There is some room for earnings to pick up steam here if the tariff tantrum is really behind us and the BBB unleashes a fiscal boom.
Spreads
Credit spreads seem agree with the above, with both investment grade and high yield spreads back near the February tights. A potential divergence is looming between spreads and equities, so that bears watching.
Priced for Perfection
Valuations are unquestionably stretched again, with the price/FCF ratio nearing the old highs on both an equal-weighted and cap-weighted basis.
Cost of Capital
The market’s peak valuation continues to impress, especially in comparison to the rising cost of capital around the world and in the US. The chart below shows a stark divergence between bond yields and equity P/E’s. For now, the Fed model has not been triggered as yields remain below 4.5%, but that could change on a dime.
Global Equities
Global equities are participating in the risk rally, with the MSCI ACWI ex-US index making new highs in both USD and local currency terms. Relative momentum curves continue to converge, indicating a chance in leadership.
The MSCI EAFE index is also making new highs (in both USD and local currency), and two-thirds of the stocks in that index are participating. Looks good.
Even emerging market equities are having a moment, at least ex-China.
The Fed
While the Fed punted in June, expectations are mounting again that rate cuts will be soon underway. The forward curve now dips to 3% in 2027, down about one rate cut from a week ago. With the core-PCE still stuck at 2.7% (where it has been for the last 12 months), I see neutral as 3.7%, which allows for 3 rate cuts but nothing more.
Liquidity
With the debt ceiling soon to be raised by another $4 trillion, questions loom around what will happen to the Treasury’s mix of maturities to be auctioned, as well as its cash balance at the Fed (the TGA). Overall liquidity (measured as the Fed’s bond holdings adjusted for the TGA and reverse repos), has been flatlining for two years now, in line with the monetary base and the ratio of M2 to GDP (above).
USD
The dollar’s weakness has been palpable as of late, with the DXY continuing to make new lows.
Cleanest Dirty Shirt no More?
One of the big questions remains whether a new world order is emerging in which the US dollar loses at least some of its supremacy and is supplanted by a mixture of other fiat currencies and hard money (gold and perhaps Bitcoin). Maybe this regime change was signaled three years ago when gold stopped trading in lockstep with real rates.
USD
The latest iteration of this potential secular change is the US dollar’s inability to rally during times of stress, or when interest rate differentials support it. If the dollar is in a sustained downtrend, it could provide a major tailwind for non-US equities and commodities.
Gold & Bitcoin
With risk appetites rising, the baton has been passed back to Bitcoin, following the pattern of recent months. You can see that in the chart below, with the two Sharpe Ratios converging.
Bitcoin
With both liquidity improving per the global money supply and the stock market reaching new highs, it’s no surprise that Bitcoin is on the move again. Both Dr. Jekyll and Mr. Hyde are being supported for now, and Bitcoin should be at new all-time highs soon enough if this momentum continues.
Bitcoin continues to be straddled by my demand model and the power curve of its wallets. Up and to the right.
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