Markets in transition: Insights from Jurrien Timmer

A range-bound market outlook

After a 21% correction, equity markets have shown signs of recovery, similar to past patterns observed after similar drawdowns. However, the outlook suggests a more tempered phase ahead. With earnings growth moderating and valuations already elevated, the market may remain range-bound over the next several months. This type of environment isn’t unusual following strong multi-year gains. It may simply reflect a period of consolidation rather than a directional trend.

Rising yields and valuation pressure

Interest rates continue to play a central role in shaping equity valuations. As the U.S. 10-year Treasury yield approaches 5%, it becomes increasingly competitive with equity earnings yields. This dynamic, often referred to as the Fed model, suggests that higher yields can compress price-to-earnings (P/E) ratios. A modest shift in yields could lead to a 3–4 point decline in P/Es. While this could potentially impact equity prices, it's important to consider the influence of earnings growth.

Policy risks and the “put” dynamic

Geopolitical developments and trade policy remain important market drivers. Recent tariff discussions, particularly involving the European Union, have reintroduced some uncertainty. Historically, markets have responded to such rhetoric with volatility but have also come to expect a degree of policy moderation if financial conditions tighten too quickly. This perceived policy may potentially help manage downside risk, but it could also influence market reactivity and sentiment.

Global capital reallocation underway

With persistent fiscal deficits and shifting trade dynamics, some capital may begin to flow toward other regions. This doesn’t imply a sudden reversal but rather a gradual rebalancing. Assets such as international equities, gold and even digital currencies have gained traction recently. These shifts suggest that investors are exploring a broader set of opportunities beyond traditional U.S. markets.

Growth, productivity and the debt dilemma

The long-term fiscal outlook remains a key consideration. With debt servicing costs rising and limited flexibility in discretionary spending, the path forward likely depends on economic growth. Productivity gains—potentially driven by innovation and technology—may be the most viable way to manage debt sustainably. A useful metric to watch is the gap between nominal GDP growth and the 10-year Treasury yield. As long as growth exceeds funding costs, the situation remains manageable. However, a reversal in that relationship could present challenges.

Conclusion