Markets supported by strong fundamentals and earnings growth: Insights from Jurrien Timmer - May 25, 2026
Equity markets have continued to move higher, supported by strong underlying fundamentals. Earnings growth remains robust, with forward estimates expanding at a rapid pace, while operating margins are reaching new highs and credit conditions remain stable. Fidelity’s Director of Global Macro, Jurrien Timmer, shared insights into how these factors continue to underpin market performance. Rather than focusing on index levels alone, the more important drivers are earnings growth and how much investors are willing to pay for those earnings, together shaping overall market direction.
Here are some of the key points from his commentary.
Why this cycle looks different from past bubbles
Comparisons to the late 1990s are common, particularly as enthusiasm around artificial intelligence grows. However, the current environment appears more grounded in fundamentals. During the tech bubble, market prices moved well ahead of underlying earnings. Today, stronger margins, solid earnings growth and stable credit conditions suggest valuations are more closely aligned with fundamentals. This does not eliminate risk, but it highlights a different starting point than previous cycles.
AI enthusiasm remains strong but expectations are elevated
Demand for AI-related opportunities continues to draw investor attention. However, the increased competition in positioning has led to a more challenging environment for potential upside. When expectations are high, companies often need to consistently exceed forecasts to sustain momentum. Over time, that can become more difficult. This does not suggest the theme is broken, but it may lead to periods of more muted performance or increased volatility.
Interest rates remain a key variable
While fundamentals remain supportive, interest rates are becoming more influential in shaping market outcomes. Bond yields have moved higher, with the U.S. 10-year yield approaching levels that begin to compete more directly with equities. As yields rise, they can place pressure on valuations, as investors reassess the relative attractiveness of risk-free returns. If yields were to move higher, valuations could adjust lower. For example, a rise toward 5 percent could correspond with a reduction in equity valuation multiples. However, this does not necessarily translate into equivalent declines in market prices, as continued earnings growth may offset some of that pressure.
The growing link between stocks and bonds
As yields rise, the relationship between stocks and bonds is also shifting. The two asset classes are becoming more closely correlated, meaning moves in one are more likely to influence the other. This reflects a simple dynamic. When bond yields increase, fixed income becomes more competitive, and equities may need to adjust. As a result, changes in the bond market can have a more direct impact on equity performance than in periods when the two moved more independently.
Commodities and inflation as potential catalysts
Commodity markets remain an important area to watch. Rising prices for oil and other inputs can influence inflation expectations, which in turn affect bond yields. There is currently some divergence between commodity prices and inflation expectations. If that gap narrows, it could lead to renewed pressure in bond markets. In that scenario, higher yields could again feed through to equity valuations.
A shifting backdrop for diversification
As correlations between stocks and bonds increase, traditional diversification may become less effective. This has prompted greater focus on assets that behave differently across market conditions. Commodities, cash, and other alternative strategies have historically offered diversification benefits. While outcomes can vary, broader exposure may help balance portfolios when both equities and bonds face pressure.
A global dimension to rising rates
Rising yields are not limited to one region. Bond markets across several major economies are experiencing similar upward pressure, pointing to a broader global trend. This suggests the move is not driven by country-specific factors alone. Instead, it reflects a more systemic shift that may influence markets across regions and asset classes.
Oil, geopolitics, and market sensitivity
Geopolitical developments, particularly those affecting energy markets, remain an important influence. Changes in oil prices can feed through to inflation expectations and bond yields. If oil prices were to stabilize or decline, it could potentially alleviate some of the pressure. That could allow markets to refocus more on underlying fundamentals, including earnings growth and corporate performance.
Broader market participation could return
Recent gains have been led by a narrow group of large companies. However, there are signs that participation may be broadening. If conditions stabilize, sectors and regions may have the potential to contribute to performance. This would point to a more balanced market environment, rather than one driven primarily by a small group of leaders.
Conclusion: Watching what comes next
The current market backdrop reflects a combination of strong fundamentals and evolving risks. Earnings growth, margins, and credit conditions continue to provide support for equities, while rising interest rates and shifting correlations introduce new considerations. The balance between these forces is likely to remain important. Developments in bond markets, inflation, and commodities may continue to influence how markets respond in the period ahead.
