by Jurrien Timmer, Director of Global Macro for Fidelity Management & Research Company
Thank you, Charleston
I spent a few days in Charleston, SC for a client event for our branch there. I have been to every corner of the world but for some reason I had never been to Charleston. Such a lovely place, and a photographer’s dream. I was walking around and saw this building (above), observing the figurine in the window. I snapped a picture, not realizing that the figurine would show up perfectly juxtaposed on the window across the street. Now it looks like someone observing the observer. A little creepy, but cool! I am sure there is a metaphor in there somewhere, for life or the markets! Speaking of which, let’s take inventory of where things stand.
For the markets, last week was more of the same, with strong momentum in the tech/AI space propelling the market away from concerns about oil shortages as the Strait of Hormuz remains mostly shut. Per the heat map below, the cap-weighted S&P 500 made new highs last week while its forward P/E ratio remains 10% below its high. Breadth is OK, with 53% of stocks trading above their 50-day moving average and 57% trading above their 200-day moving average. It’s nothing to write home about and illustrates that the thrust higher since the March 30th low has been dominated by the Mag7.
Uniform rally
While the rally from the March 30th low has been fairly uniform in absolute terms, the cap-weighted index has dominated the equal-weighted index, which remains below its January highs.
1990 analog
The market continues to trade along the 1990 Gulf War analog, presumably betting on a quick reversal from the current oil spike. The valuation drawdown of 18% has been a spitting image of the 19% drawdown back in 1990. Let’s see if the analog lasts.
Earnings to the rescue
Booming earnings growth has been a dominant feature of the market’s resilience amid some unsettling geopolitical headlines. Were it not for earnings estimates accelerating to a 20% year-over-year rate, surely the recent 9.8% drawdown would have been closer to the nearly 20% haircut in valuations. We can see from the earnings band below that the S&P 500 index “touched” the upper bound at the January highs and likewise touched the lower bound at the March low. If that back-and-forth continues, it could mean considerably more upside as forward estimates continue to accelerate higher.
AI boom
The AI space continues to dominate, with semis now leading the charge. The hyper-scaler plays hardly budged during the Iran volatility and are now rocketing higher. It proves the old adage that when a stock refuses to go down, it will inevitably go up.
Cats & dogs
Even the “cats and dogs” within the tech space are stirring again, making new recovery highs last week as they rallied out of a holding pattern.
Resilient Bitcoin
Bitcoin also continues to show resilience as it tests the upper bounds of a potential bear flag. Technical Analysis 101 states that when bear market rallies get overbought (per the stochastics below), it’s usually the kiss of death and time to sell. However, during bull markets overbought momentum means that the market is strong and likely to stay strong. My conclusion is that if Bitcoin cannot be pulled down by this current combination of overbought momentum and trendline resistance, then this is an emerging bull market and not a bear market rally. That’s been my hunch all along and it may be about to get confirmed. More on this later.
Earnings season
Q1 earnings season is underway and so far, so good. With 137 companies reporting, 79% are beating estimates by an average of 1019 bps. This is in line with the robust performance of the past four quarters, which suggests that the earnings boom is not losing any steam.
Not just AI
While it’s tempting to lay it all on the AI story, earnings are booming even faster outside the US. The year-over-year change in forward estimates is 25% for the MSCI ACWI ex-US index, vs 23% for the MSCI US index.
Global boom
The chart below visualizes the global earnings story. Everything is on the same log scale, which allows us to compare apples to apples in terms of the direction of each set of squiggles. EM has by far the greatest earnings momentum right now.
Valuations
While valuations in the US remain a concern for many investors, in my view they are justified by the macro fundamentals of all-time high (and rising) margins and tight credit spreads. Those two variables are the independent variables in my regression below, which suggests that the equity risk premium should be 4.0% (instead of the historical average of 5.0%). Based on that regression, the fair value for the S&P 500 index is 7455 and rising.
Sentiment
Sentiment has improved since the March 30 low, as one might expect. The II survey never “crossed over” at the low, and is currently well shy of the bullish extremes from the January high.
Mountain of cash
We haven’t heard much about that mountain of cash supposedly sitting on the sidelines waiting to get sucked into the market. My take has been that the $7.8 trillion sitting in money market funds came from the banks and not the stock market back in 2023. That’s when the mini-banking crisis hit (SVB & FRB) while bank deposit rates remained much lower than money markets. Having said all that, we can see from the chart below that the ratio of money market fund assets relative to the stock market’s capitalization (10.2%) is about 200 bps higher than where they should be on the basis of credit spreads (which are highly correlated and do a good job in illustrating risk appetites). So, one could make the case that there is around $1.5 trillion of dry powder that could fuel stocks higher still.
The Fed & rates
Bonds have remained eerily quiet and continue to sit near the apex of a long triangle. With Kevin Warsh now about to take the helm of the Fed, we are about to enter what we might call the Warsh-Bessent Treasury-Fed Accord part 2.0. That suggests lower short rates (rationalized by arguing that R* is much lower than we all think), a steeper yield curve, and a soon-to-be deregulated banking sector that is supposed to “privatize” the Fed’s balance sheet.
K-shaped economy
Why privatize the balance sheet? The Wall Street vs Main Street debate is part and parcel of populism, and we can see why below. There is a clear “K” evident between GDP growth (which remains above potential) and consumer confidence, which is near all-time lows and continues to be held down by a CPI index that is 29% higher than it was before COVID. Yes, the rate of change has moderated, but that’s apparently cold comfort to many Americans.
Fiscal Dominance
With inflation proving to be sticky once again (at 3%), lower short rates are not likely to happen soon, according to the SOFR curve. If the Treasury-Fed decides to push them lower anyway, the long end of the bond market may well object, as will the dollar, as well a majority on the FOMC. It could get interesting!
60/20/20
I continue to advocate looking beyond the simple 60/40 paradigm to seek protection from both the 60 and the 40. Bonds are still a viable asset class but they are no longer a surefire diversifier to equities.
Diversifiers
Per the correlation chart below, commodities have taken the lead as a top diversifier during the Iran conflict, as both equities and bonds suffered losses. Managed futures (CTAs) have also been heroes, unlike a year ago when they got whipsawed by the sharp market reversal in April 2025. Both assets continue to get less and less correlated to both stocks and bonds. That’s what we want!
Commodity bull
The Bloomberg Commodity Spot index continues to show impressive strength, even as both oil and gold continue to churn.
And the secular bull market (per the CRB index below) also remains intact. In an increasingly fragmented world, commodities are become strategic assets again.
Bitcoin in ascension
I continue to watch Bitcoin here following its mild winter from $126k to $60k. Its momentum and Sharpe Ratio continues to improve vs gold and other asset classes (including commodities). There has been a clear rotation away from gold ETPs back into Bitcoin ETPs.
While Bitcoin’s true believers say that you should never sell, for me Bitcoin is one of many assets to choose from on the 60/20/20 menu, and there are levels at which Bitcoin makes sense and at which it doesn’t. Per the chart below, which shows the detrended gold/Bitcoin ratio in blue and the spread between Bitcoin and its power law in pink, at the recent low we got a double-accumulation signal. If the bear flag in the earlier chart gets rejected by new highs, the next bull may be underway.
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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