FOCUS 2026: Big picture briefing: The forces shaping markets right now

Jurrien Timmer: [00:00:02] Hello, everybody. I've never seen myself in a video like that before. There's always a lot to talk about but this time, today, there's a lot to talk about. There's some really interesting developments that is creating somewhat of a high stakes environment for all of us in the markets. If you think of it as tail risk we're living in a tale of two tails, if you will. We have a big right tail, the AI boom. We have a big left tail, the Iran conflict and what it does to the supply of oil. We're going to unpack both of these. As my colleagues in the room, David here, the other David, Ilan, all of them know these days we're starting our day and our week looking at all the fast moving parts in the market relating to the Middle East. I won't quiz you on this later but there's a lot of stuff going on and it's our job to find the narrative, to find the signal among the noise. We can count on all kinds of tweet storms coming from the White House. Every Sunday  there's a tweet, every Friday there's a tweet, makes you wonder if certain people are setting up news headlines that they could profit from but who am I to question that? Let's talk about where we are in the markets and then I'm going to unpack both of these tail risks and then talk about what we can do about it.

[00:01:35] The cyclical bull market which started here in October of 2022 is now 3 1/2 years old. It's looking just fine. Every time you get a little bump in the road the market comes right back. It certainly has done so from the news in Iran which is now what, seven weeks ago. Whether the market's whistling past the graveyard or not is another question which I'll unpack in a moment. This is the market cycle. Market's up about, S&P 500, it's up about 110% over 3 1/2 years. That makes it a longer and stronger bull market than typical but not outlandishly so. The bull market's intact and in terms of the secular trend, which in my view started here in 2009, the secular bull market is also not only intact but actually finding new ways to invigorate itself. If you look at the very long term trend line going back 150 years market goes up about 10, 11% a year, 7% in real terms. If you measure the trend line from the '09 low, we're now in year 17 of a secular bull market, the average is about 18. I hate to mention that but it's an average of three cycles so it's not really statistically significant.

[00:03:02] You can see that we're well above the central trend line and we're even above the secular trend line and we're accelerating higher. It comes at a price, of course. The P/E ratio is among the highest it's ever been but I'll mention later that it's actually justified. It does create the inevitable comparison to the dot-com bubble back in 2000, and we're going to unpack that as well. So far, there's nothing I can see in this secular trend that tells me it's about to end. There's no valuation bubble, it's top-heavy  but we've been through many decades in the past century where that can be sustained without the trend breaking. So far, so good. If we're investing in equities, which we all probably are, you still have tailwinds, right? You have earnings, you have valuations are okay. Technically, the trend is solid both cyclically and secularly so there's not a lot not to like.

[00:04:09] Let's start with the right tail at this point. These squiggles are weekly earnings estimates that are aggregated by Bloomberg. I get them every Friday and I manually input them into my spreadsheet, and I've been doing this for at least the last 10 or 12 years. I've never seen this before. What typically happens is if this is earnings season over the previous 12 months or so the estimates drift lower and then you have earnings season and companies, lo and behold, beat those estimates. The oldest game in town. Market still does it. Typically, that's what happens. What we're seeing instead is that earnings are exploding higher. The incoming waves, if you think about this as waves in the ocean, they're rising instead of falling. There is a lot of earnings momentum. It is top-heavy, right? I mean, companies in general are posting good earnings but this is created by the big hyperscalers, the big AI plays.

[00:05:17] It's a remarkable thing to see in year four of an expansion, to see actually an acceleration. Typically you see these things happen coming off of a bottom because you have base effects creating a high growth rate not in a mature business cycle. What that's doing is it's lifting the yearly number. This is the calendar 2026 estimates so these are growth rates. We're now at 22% and earnings season isn't even over. Again, that's remarkable because the cycle started in 2022, 2023 we had negative 3% earnings growth, '24 we had +11, '25 we had +13, '26 we're now at +22 and rising. It really is a remarkable and very bullish thing to see. It's hard to argue that stocks are over their skis if earnings are doing this much heavy lifting.

[00:06:18] What's happening? Of course, we all know the story. It's AI, it's CapEx, it's in part also the One Big Beautiful Bill Act from last year, lets companies, expense their capital equipment. What we're seeing is that CapEx is exploding higher. It was $76 a share in 2020, it is now $194 a share as a share of [audio cuts out], 5.5% in '22, it's now at 9% and this is causing earnings to accelerate higher. It's a great story, right, because the great hope for the AI boom is that it lifts productivity to a new level which is what the world economy needs. We have ageing demographics, we have, in some cases, a shrinking labour force but in other cases just a slowly growing labour force, we have mountains and mountains of debt that needs to be financed and unless you want to default or have austerity, which tend to not be popular outcomes, outgrowing the debt is obviously the most attractive option. Ray Dalio would call that a beautiful deleveraging.

[00:07:35] The second good option or the second option is to debase and devalue. That, of course, has been happening as well. This is a very solid, fundamental story. You can see that the earnings estimates just keep rising. This is what we want to see in a bull market and that's why I remain constructive, at least on the 60 side, of the paradigm. It's not just a US story. This is all on one log scale. These are the Mag-7 earnings, these are the S&P earnings estimates. This is EAFE, non-US developed, and these are EM. You can see that it is a global story and especially EM right now is booming in terms of their earnings, obviously AI playing a role there as well.

[00:08:26] What can go wrong or what can right? Here's the AI story. If you remember last October I think we were in Palm Beach, or some of us were, the story of the day at that point was is AI turning into a bubble. I remember I was doing a lot of media interviews and that was the first question everyone would ask because some of the, let's say, cats and dogs of the AI theme started to bubble over, non-profitable tech, SPACs, retail favourites, things like that. We did not get the bubble because investors started to ask the right questions about software disruption from agentic AI, how much CapEx is too much, will we ever see an ROI on that? Those are good critical questions to ask and in bubbles nobody asks those questions. Everyone is just along for the ride.

[00:09:25] What we're seeing on the AI side is now some discrimination between the winners and the losers. Here are the software stocks, here are the memory stocks, this is becoming much more of a differentiated trade. That's good. But now we're six months later and things are starting to perk up again. The question is are we now going to have an AI bubble? That's a good question to ask. I've shown this chart before but if we look at the internet boom turned bubble, the internet boom started in '95, '96, that's when Netscape went public, and it was just going along nicely and then in '98 we had long term capital management blow up, we had a 22% decline in the S&P. It recovered very quickly because we were in the same phase of the secular bull market then as we are now. Greenspan added some fuel to the fire by cutting rates three times. Then in '99 this happened and the internet stocks, this is the IIX index which doesn't exist anymore, blew off. It bubbled over. It melted up.

[00:10:40] If we compare that to now, for instance, the data centre stocks, you see a similar path. The P/E is getting up there at 62 times. Again, I'm not saying this is a bubble that's about to burst but we got to look at history. We can learn from history even if history doesn't repeat exactly. My job is to look at these old stories and what happened next so that we at least are aware of the tail risk. I could see this following the same track. At the same time  if we look at the S&P 500, again, this is that 1998 long term capital, here's the Iran conflict, it has followed the late '90s very, very closely. You see the P/E, this is now on the memory stocks, at 51, not too high but getting up there. This is something I'm keeping an eye on as, again, the right tail. We got the tall risks and one thing we knew when Donald Trump was elected is that we were not going to get any of this middle stuff. It was going to be either a left tall or a right tall or maybe both tails at the same time, which is kind of what we're having right now.

[00:11:58] This is the right tail. We still have time. Maybe we don't get this part, maybe it just keeps going. Depends on valuation and the valuation side is still pretty good. We've been trying to explain, okay, how can the cyclically adjusted P/E be at 40 on a 10-year basis or at 32 on a 5-year basis, trailing P/E is around 25, market's expensive. One thing I've learned is that profit margins, which are making new all-time highs almost on a weekly basis, they're 16% right now. Credit spreads, which are near all-time lows, those two factors explain a lot of the valuation story in the market. When I look at a discounted cash flow model where you look at the cash flow on the top, the cost of capital on the bottom, it tends to be explained by those two factors. When I do a little regression and I account for margins and credit spreads and I look at the equity risk premium, which right now is about 4%, it's actually justified. The value of the S&P actually is almost exactly what this model would say it is.

[00:13:19] The market is not overvalued, the S&P is not overvalued at this point based on these factors, whereas in 1999 it was grotesquely overvalued by these very same metrics. We are not in a bubble, we're in a boom, and a boom and a bubble are not the same. Of course, booms are very sustainable, bubbles are not. We need to be on the lookout for signs that maybe the AI boom does become an AI bubble. That's something that we will be doing in the coming months and you'll be hearing about it every Monday at 11:30 when I'm on with Pamela. So that's the right tail.

[00:14:01] Now to the left tail. This is pretty interesting and a little disconcerting. We obviously have a conflict in the Middle East. Strait of Hormuz is almost all but closed. A few ships are passing through every day but it used to be 100, 125 and we're in low single digits today. We have a few different ways that this can play out. I think the market is assuming that this is going to be like Gulf War number one back in 1990 when Iraq invaded Kuwait. We went in there looking for all this WMD and there was nothing. Everybody just put up the white flag and it was over and done before it barely started. That was this spike here in crude oil. These are crude oil prices in today's dollars so they're inflation-adjusted but expressed in today's dollars. In today's dollars back in 1990 crude oil went from 41 to 100 back to 43. As a result the P/E ratio in the S&P went down 19% and then recovered everything exactly as the mirror image of crude oil. That's not an accident because crude oil is, of course, extremely important for everything in the economy with inflation, rates, et cetera.

[00:15:24] Another example, though, was 2022 when oil prices in today's terms went from $79 to 134 and it ended up staying elevated for quite some time before it finally went back to where it started. That was a longer decline, a 31% haircut in the P/E. That was 2022, of course. We had the rate reset and all that, we had 9% inflation but that was a longer, more drawn-out bear market caused by other factors as well, not just by oil. To me, those are the two examples. The market is very clearly betting on the former because if you look at the P/E ratio we're basically doing what happened in 1990. The P/E is still down about 10% from its high but price, as we all know, has already made new highs. The question is, is this correct? The market has latched on to the AI boom, the earnings story, and it has completely moved on from Iran.

[00:16:29] I don't know that that's really the right thing to do. I spent my weekend geeking out. I'm always learning something new. We have some great thinkers at Fidelity, both in Canada and in Boston and elsewhere. Our sector leader, Ashley Fernandes, has done, obviously, a lot of work on the oil stocks. We have one of our veteran thinkers, Bob Bertelson, who has been writing about this. When you look at, and I was guilty of this, when you look at the oil strip, the futures forward curve, you have a chart and spot is here and the forward curve is like this. Oil for delivering nine months from now is about $78, oil spot is about 110. If you go all the way out for the next 5 years oil is at $50. I always assumed that that curve is kind of like the Fed funds forward curve. We don't really care where the Fed funds rate is today, we care where it's going in the future and that is based on Fed guidance and all the wizards in the bond market calculating what the forward curve should look like.

[00:17:44] I always assumed that there was a signal in this curve, whether it was in contango, which is upward sloping, or in backwardation, which is downward sloping, that was the voice of the market saying this is the real price of oil and what the price is today is going to be transitory. Now I'm not so convinced that that's the case at all. Actually, I'm convinced that it's not the case. I think the market is sort of whistling past the graveyard saying, well, you know, yeah, oil's at 110, that's really bad, but it's going to be at 75 nine months from now so this too shall pass. What I did over the weekend, I was geeking out talking with Bob and Ashley and with an assist from my new best friend, ChatGPT, who has all the answers that I could ever ask questions about. It doesn't always have the right answers but it has answers, high conviction answers.

[00:18:41] I looked at this spread and what it means. What it means is what's considered or called the convenience yield. If you're in the oil business  you have to look at your carrying cost, you have to look at your storage cost, your insurance, and then how tight the supply is. The result is that this is the convenience yield and most of that is what is called a scarcity premium. Of course, oil is scarce because it can't move through the Strait of Hormuz. What this chart shows, and it goes back a couple of decades, is that the oil market is in a severe state of stress, the most stress that it's been in for decades. Now, we know that because oil can't move but this curve is really just a mathematical expression of this scarcity premium. It's not a view of market participants, oil traders, anything else, it's just math and the curve rolls down because there's a shortage of supply. I worry that the market is complacent that they assume the forward price is correct and that the spot price will go down when, in fact, it could be the other way around, that the forward price is incorrect and will go up as we get closer to that forward price over time.

[00:20:05] I'm worried that if there is not a quick resolution, and we're already in week seven or eight of this, that oil prices will really start to have a snowball effect on not only our asset classes but monetary policy, fiscal policy, and everything else. One thing that we've seen is that when this Iran crisis started stocks and bonds have become increasingly more positively correlated to each other, meaning bonds and stocks go down together, they go up together, and stocks and oil have become increasingly more negatively correlated. The conclusion is very simple. If oil stays up stocks are going to go down, bonds are going to go down, yields are going to up. It's going to prevent the Fed from cutting rates. That feeds back into the fiscal loop, and I'll talk about that in a second, and we're going to need places to hide if that happens. Normally, if we had this left-tall risk, and I don't know if the tall risk will materialize but it's clearly a risk, normally I would say, okay, you build some cash, you get some insurance. You buy some bonds but we can't do that because bonds and stocks are correlated.

[00:21:25] This left tall risk is happening at the same time that we have this huge right tail risk with the AI boom, which is why the market has moved on from the Iran story so quickly. It is really kind of a precarious high stakes game right now. Here's the correlation, stocks and bonds, stocks and oil. Again, this is the forward price for oil. This is the spot, we're kind of over here now. I think the market is betting that the spot is wrong and it's going to go down. If it's the other way around I think we're going to have some trouble. That brings me to the bond market.

[00:22:06] This is a chart of the 30-year yield. Technical analysis 101, and I've been looking at charts for four decades, that looks like a continuation pattern. Patterns are either continuation patterns or reversal patterns. This is called a triangle and it tells me that yields may very well start moving higher. The 30-year is already at 5, the 10-year is around 4.35. As I always like to say, nothing good happens above 4 1/2. Again, if this situation persists we may very well be above 4 1/2 and then Scott Bessent's going to start to get nervous because he doesn't like high yields. That's something we need to keep an eye out for.

[00:22:52] The other part is what it means for the economy. Here's crude oil, again, inflation-adjusted terms. This was the 1973 oil embargo, 1979 the Iranian revolution. This was the 2000s when we were all worried about peak oil and there was not going to be any oil. That was before we discovered fracking. This was during COVID when the front contract went negative. This was 2022 when inflation was at 9%. This was the Gulf War in 1990. Think about this. Hopefully, this doesn't repeat but back in the late '60s we had the guns and butter era, Vietnam War, social programs. Inflation went up after being dormant for many, many years. It went back down but it didn't go down enough to take the long term growth rates down. Then we had the oil shock right there, that was the 1970s, not a happy story. We've kind of done the same with COVID and we went back down but only to about 3%.

[00:24:01] If we do get another shock and again, I'm not predicting that we will, we're coming off of a higher base so maybe inflation remains structurally higher than the Fed's target, or the Fed would like to see. If it goes from 3 to 4 that gets you to the Fed. Inflation is going back up, the market has unpriced the three rate cuts that it was expecting earlier this year so the Fed really has no room or business to cut rates at all. If you look at the Taylor Rule, which is an algorithm that says the Fed funds rates should be a neutral rate plus a growth component plus an inflation component, I've sort of parsed various iterations of this and they're all starting to move a little bit higher because inflation is moving higher. The Fed really doesn't have any room to cut rates. You could even argue the Fed might have to raise rates.

[00:25:00] Now, that brings us to the future new Fed with Kevin Warsh coming in. I like to think of it as the Treasury Fed Accord 2.0. The first one was in the 1950s after the financial repression era of the 1940s with World War II. Kevin Warsh who's going to come in as the new chair, Powell is, what do you call it, showing his middle finger to President Trump by staying on the Fed for a couple more years so he doesn't have an open slot to fill. We'll see how that goes. Warsh and Bessent are going to work together to make it attractive for banks to own Treasuries so that they can essentially privatize the Fed's balance sheet. That gets you into this notion of Main Street versus Wall Street. This was the Fed's balance sheet pre the financial crisis, which is when the QE era got started. The banks generally would own more Treasuries than the Fed. Then that flipped around. I think Bessent and Warsh want to change that because they want the benefits of Fed policy to accrue to Main Street and not Wall Street.

[00:26:20] That has to do with the K-shaped recovery. This is the output gap in the economy, this is the University of Michigan Consumer Confidence Survey. It's basically at an all-time low. This is obviously what causes populism, which we had under Biden, which we now have under Trump, or at least that's what they call it. The idea is if the Fed owns assets it distorts the price. It accrues to the wealthy because they are the asset owners. If the banks do it instead they can multiply it into the economy and Main Street will benefit. I think there's a larger agenda here, lower short rates by as much as possible, and some of the Trump followers at the Fed like Stephen Miran are already coming up with, in my view, somewhat tortured conclusions about the reason the Fed can ease is because R-star is actually much lower than we think. Okay, fine. At least they're arguing over something that can't be disproven so that's very clever. I think over the next couple of years we're going to see this play out. They'll deregulate the banks, they'll try to lower short rates. If they do it too much and the market believes it's not credible then long rates will go up, dollar will go down, and that's part of the fiscal dominance playbook that we want to protect against as well.

[00:27:49] What does it all mean? You've all heard me talk about the 60/20/20. I think the 60/40 where you can just be in S&P and Bloomberg Ag, investment grade bonds, I think those days are over. That only works when correlations are negative and they flipped positive in 2022. They kind of became less positive last year and now they're becoming more positive again. This, I think, is a simple model that doesn't really work anymore. I've got the 60/20/20. It's not investment advice. It could be 30/10, it could be 10/30, it could be whatever you want. You always want to be in the anchors of a portfolio in equities but you also want to have some protection for when inevitably equities have drawdowns like they have every six months or so. Where do you go for that when bonds are not protecting you anymore? I do want some bonds, maybe 20, because bonds do have a positive real yield so that's important. I don't want to do it at the expense of the 60. What I would do in a top-heavy market where there is concentration risk, I would paint this with a more global brush.

[00:29:08] EM, developed markets, Canada, Canada is finally in a good spot. Maybe the US administration will play a little nicer now that they've created a giant mess in the Middle East. You guys have commodities which is now a strategic asset around the world. In the rest I want to have commodities,  gold, I'm getting more and more excited about Bitcoin again and various alternatives. We had David first on long/short equity, managed Futures is doing a really good job right now in holding value in a turbulent market. That's how I think we can protect ourselves because in a world where correlations are positive and if that left tail materializes commodities are going to be the best asset to be in. The way I think of it is you have bond-like assets here, you have equity assets here. So this is the correlation to long term Treasuries, this is correlation to the S&P, and this is the diversifier bucket.

[00:30:16] If we look at how this bucket is unfolding today, or the last few months during this Iran conflict, this is again a rolling correlation. You can see this arrow here is moving to the right, this one is moving to the top, that tells you that bonds are becoming more correlated to stocks and, obviously, stocks more correlated to bonds. These are equal-weighted stocks, high yield bonds, this is the Ag, TIPS over there. This is the bucket that protects us not only against drawdowns in the stock market but, more importantly, drawdowns in a bond market. You can see the BCOM, that's the Bloomberg Commodity Index, you have the US dollar, CTA is managed futures, they are all moving further and further to a negative correlation against both stocks and bonds. That's the Holy Grail of diversifiers. This, I think, is the way to have some Insurance policies in case that left tail does materialize even as the right tail is materializing at the same time in different spaces, of course. It's a very interesting thing to really solve for.

[00:31:31] This is my index 60/20/20. It's just an index, it's not an actual portfolio or a fund. Here's Bitcoin. Momentum is building in the Mag-7, that's the AI boom. Momentum has faded in gold which I think is temporary. Momentum is strong for the commodity index and it's very oversold and rising for Bitcoin. In my last three minutes I'll just talk about Bitcoin and gold for a moment. Bitcoin is just the most fascinating thing ever. It is really a very unique asset class. It follows what we call a power law math. It forms very well-defined waves, up and down, up and down. 126,000 was the peak in October, once we broke that trend line I declared that wave to be over. If you do a log scale regression of these up and down waves you see a very clear pattern where each wave lasts a certain number of weeks, produces a CAGR of X and then it ends. That's the four year cycle for Bitcoin.

[00:32:41] As Bitcoin matures the waves get smaller. The up waves get smaller, the down waves get smaller. I've been eyeing 65,000 really since last December. We got briefly to 60, we're now in the high 70s. Just like gold or other assets you can value Bitcoin, even though it doesn't create a cash flow, and you can compare Bitcoin to gold, you can compare gold to silver, you can compare physical gold to the gold miners, there are all these pair trades that you can do. When you compare a gold to Bitcoin and you de-trend it you can see these signals here, very reliable that once gold has outperformed Bitcoin by a certain degree, when the Z-score goes to 100%, you flip, you trade spots.

[00:33:33] Same thing in terms of Bitcoin against its power law. This rising trend, if you do a support line the distance to that support line also becomes a metric. This is how I think about Bitcoin. I don't follow the Bitcoin religion. Nobody should ever be religious about investable assets. This notion that you HODL on diamond hands, you never sell it, it's bullshit. It's an asset. It's on the menu like any other asset. There's a price where it makes sense and there's a price where it doesn't. That's how we asset allocate. That's how I think about Bitcoin.

[00:34:14] Gold has now also become positively correlated to bonds, which is very strange. You wouldn't think that. That's because I think in the Middle East as the stress level rises and Gulf countries can't move their oil they sell their gold reserves or they sell their Treasuries to meet cash flow needs. I think that's why gold and bonds are now positively correlated. Over the long term gold follows the global money supply. Again, you can value gold, not with a cash flow but you can compare it to the money supply and say when fiat money is growing too fast hard money takes market share, and that's exactly what happens. The global money supply is growing at 10%, $121 trillion. Gold is a little bit below that because it has this stress right now and also because there's a reverse rotation, I think, happening from gold back to Bitcoin, which leads me to my last slide.

[00:35:13] Here you see kind of the fast money going into Bitcoin ETPs then rotating out as it rotated into gold and now the opposite is happening. This is Bitcoin priced in units of gold and we have a nice reversal here. For my 60/20/20 I want to own both. Generally, my rule of thumb is 4:1 gold to Bitcoin to equalize the volatility. Maybe right now I would do 3 and two or even 2 and 3.  Then you just rotate once every couple of years just like you would between other sectors in the market. It's 1:48, my time is up at 1:50. I will finish. This is ChatGPT. It's making me much better looking than I really am, and much younger, too. I will see you all Mondays at 11:30. Thank you very much for listening. It's a high stakes game, you want to have a good, solid, diversified portfolio and don't forget to rebalance. Thank you very much.