A market pulled in two directions: Insights from Jurrien Timmer - August 4, 2026

An earnings-driven market

One of the defining features of today's market is the strength of corporate earnings. Operating margins for the S&P 500 have climbed to record levels, while earnings growth expectations remain robust. Market breadth has also remained healthy, with a large majority of stocks trading above their long-term trend levels. Credit spreads, the labour market and broader economic indicators have also remained supportive of equities. This phase of the bull market looks different from the rally that began in 2023. Earlier gains were driven largely by valuations. Today, earnings are doing much of the heavy lifting. Because profits have grown so quickly, forward valuation measures have remained relatively contained even as stock prices have climbed. In his view, the primary opportunity continues to come from earnings growth, while the main source of risk remains the interest-rate environment.

Why interest rates matter

While fundamentals remain strong, rising bond yields continue to warrant close attention. Jurrien pointed to the recent rise in the U.S. 10-year Treasury yield and higher real interest rates as key developments to monitor. He noted that if yields continue to move higher, equity valuations could face pressure even if earnings remain strong. Using a discounted cash flow framework, he illustrated how higher interest rates can reduce the valuation investors are willing to pay for future earnings. If bond yields were to rise meaningfully, valuation multiples could compress, similar to what happened in 2022. He stressed that this was not a prediction, but an illustration of how sensitive equity valuations can be to changes in interest rates. For that reason, Jurrien suggested interest rates remain an important variable to monitor when assessing market conditions.

Can earnings offset higher yields?

The earnings outlook remains an important counterbalance to rising rates. Earnings estimates for the coming years remain strong. If earnings continue growing at current rates, they could help support stock prices even if valuations come under pressure. In that scenario, markets could move sideways for a period as earnings growth offsets the impact of lower valuation multiples. He suggested that this type of environment could give fundamentals time to catch up even as valuations adjust. Such an outcome would be very different from an environment in which earnings growth weakens materially. As a result, he does not view interest rates in isolation. Instead, he evaluates rates and earnings together, noting that the interaction between the two will likely play an important role in determining the durability of the current market advance.

A market adjusting to a new Federal Reserve

Another factor influencing markets is the Federal Reserve's evolving communication style under new leadership. Markets often test a new Fed chair as investors assess how policy decisions will be made. He drew comparisons to previous leadership transitions, when new chairs sought to establish their credibility as inflation fighters. In his view, the current leadership may be attempting to establish similar credibility. He also observed that less guidance from policymakers can lead investors to demand a higher risk premium. When the path of policy becomes less certain, bond yields may rise to reflect that uncertainty. That dynamic appears to be influencing the yield curve today. At the same time, he cautioned that it is still too early to draw firm conclusions about the new leadership's long-term approach.

The global impact of higher U.S. yields

Developments in Japan highlight how interconnected global financial markets have become. Jurrien pointed to recent intervention in the Japanese yen by Japanese authorities, with support from the U.S. Treasury. He noted that Japan's currency has faced pressure because domestic bond yields remain well below U.S. Treasury yields given the country's inflation and fiscal backdrop. In his view, currency interventions often function more as signals than long-term solutions. He suggested that U.S. involvement may also reflect a desire to prevent Treasury selling that could place additional upward pressure on U.S. yields. The situation highlights how developments in one market can influence conditions across global financial markets.

Diversification remains important

Even as headline indices have reached new highs, leadership within the market has broadened. Jurrien noted that equal-weighted stocks recently outperformed capitalization-weighted indices, while companies outside the artificial intelligence space also participated in the market advance. At the same time, AI-related stocks have regained momentum as earnings results remained strong. He also highlighted areas outside the technology sector that continue to attract his attention, including eurozone banks. Jurrien noted that these companies have kept pace with the AI space while trading at lower valuation levels and maintaining relatively low correlation with the largest technology stocks. More broadly, he believes a diversified approach can be valuable during periods when market leadership rotates and different sectors take turns driving returns.

Conclusion: Watching the balance between rates and earnings