Market dynamics and momentum: Insights from Jurrien Timmer - November 17, 2025

Momentum correction: a healthy market adjustment

After a strong rally, particularly among high-growth momentum stocks, the market has experienced a meaningful correction. The S&P 500 has risen approximately 14-15% year to date, with the MAG7 stocks up about 21%. However, many non-profitable tech and meme stocks have declined by 10-30%. This pullback acts as a recalibration, reducing the risk of an unsustainable parabolic market collapse and allowing valuations to realign with fundamentals. This phase encourages investors to shift focus from chasing momentum to emphasizing companies with solid earnings growth and sustainable business models, fostering a more stable environment for long-term investment.

Valuation and earnings growth: balancing optimism with caution

Valuations among the MAG7 remain elevated, with price-to-earnings (P/E) ratios around 35 times earnings. While high, these levels are not as extreme as during the late 1990s dot-com bubble. Earnings growth is accelerating, from 7% to 15% in recent quarters, contrasting with the decelerating earnings of the 1990s despite soaring valuations. The market is currently anticipating earnings growth over the next three to five years, with a target of around 11%, which is higher than the historical average of 7%. However, the embedded risk premium is below historical norms, meaning investors are accepting less compensation for risk, which could lead to vulnerability if growth expectations are not met. Maintaining valuation discipline and monitoring earnings trends are essential for portfolio resilience.

Monetary policy and inflation: navigating a nuanced landscape

Monetary policy continues to influence market direction. Inflation measures such as the Consumer Price Index (CPI) and core Personal Consumption Expenditures (PCE) are near the Federal Reserve’s target range of 2-3%, currently around 3%. The labour market shows signs of softening but remains relatively strong. Interest rates stand at a neutral level near 3.8%, with cautious discussions about potential rate cuts. Significant reductions may be possible if inflation continues to decline. This environment fosters market stability while introducing uncertainty about future rate paths. Investors should prepare for a data-dependent and gradual monetary policy approach, managing fixed income allocations and interest rate-sensitive sectors with attention to inflation trends and Fed communications.

Sector rotation and diversification: expanding beyond concentration

Market leadership has been concentrated in a few large-cap growth stocks, including the MAG7 and hyperscalers, which have driven much of the market’s gains since 2022. This concentration poses risks as overreliance on a few stocks can amplify volatility. Diversification is increasingly important. Non-U.S. equities, particularly in developed markets like Japan and Europe as well as emerging markets, have shown strong momentum and earnings growth. The MSCI International Financial Advisors (IFA) index demonstrates competitive performance on an equal-weighted basis, highlighting opportunities outside the U.S. to balance portfolios. Broadening exposure to international markets and sectors with different economic cycles and valuation profiles can reduce concentration risk and enhance long-term returns.

Alternative assets: contrasting profiles of gold and Bitcoin

Alternative assets show differing risk and return characteristics. Gold has historically shown strong performance and has the potential for attractive risk-adjusted returns, which could make it a useful component of a diversified portfolio. Although it may be slightly over-earned, its role as a hedge against inflation and market volatility remains valuable. Bitcoin shows less momentum and more volatile price behaviour, reflecting its maturation as an asset class. Its underperformance relative to gold in risk-adjusted terms suggests investors should carefully assess its role within diversified portfolios, balancing potential upside with inherent volatility.

Conclusion: navigating the current market landscape