FidelityConnects: Jurrien Timmer – The global macro view August 18, 2025

[00:03:51] Glen Davidson: Hello, and welcome to Fidelity Connects. I'm Glen Davidson. We begin today looking at global developments like Ukrainian President Zelensky and several European leaders being in Washington for ongoing discussions, as well as the upcoming Jackson Hole Economic Policy Symposium. In the markets Chinese equities are climbing. Shanghai listed stocks just reached the 10-year high. Treasury yields are drifting lower. S&P 500 futures are steady. Bitcoin has broken through a new level. Joining us to unpack these developments and what they mean for you and your clients is Fidelity's Director of Global Macro, Jurrien Timmer. As always, feel free to submit your questions through the Q&A box. Welcome, Jurrien. Thanks so much for joining us today.

[00:04:29] Jurrien Timmer: Good morning, Glen, nice to see you.

[00:04:30] Glen Davidson: Likewise, and you're busy looking at all the global developments, what's happening in the markets, but you're also trying to make sure that everything's coming into place for Burning Man because you're off to Burning Man tomorrow. I think it's your seventh year. Everything coming together okay?

[00:04:45] Jurrien Timmer: It's my seventh year. I run a food camp there and, actually, today is the first day that the set-up crews can show up, my crew of about 20 is there since about an hour so I'm actually multitasking from a distance, making sure that the vendors are showing up, the generators being delivered, the compostable toilets are being delivered, very important, and all of that good stuff. Tomorrow we drive to Sacramento and then on to Reno and then onto the Playa. We'll be there on Wednesday and then we'll be there until September 1st. Hopefully, we get out in one piece but looking forward to it. We're looking forward to making about 7,000 meals for the artists and the community at large.

[00:05:31] Glen Davidson: That's amazing. What's the one meal that you're looking most forward to making?

[00:05:37] Jurrien Timmer: Oh, we have so many. We have literally meals from every nationality. We have Taco Tuesday, we have a Filipino dish, we have a Lebanese grill, we have Italian. We have a crew from Hawaii who makes an amazing Hawaiian barbecue, that might be my favourite. Having poke on the Playa is always very tasty.

[00:05:57] Glen Davidson: Sounds pretty good to me. Now, you're going for two weeks so we'll see you in a few but what's been the benefit to you from getting off the grid for a couple of weeks? You've been doing this, as I said, this will be your seventh year. How has that helped your creativity and thought process?

[00:06:12] Jurrien Timmer: I think it helps reset. We're in this mode, we are always sort of chasing market data and getting on airplanes and presenting and pouring over spreadsheets, making charts, which, of course, is all great stuff, I love every minute of it, but you do get to a point where it gets a little hectic and then summer arrives, it slows down a little bit, of course. This is sort of my right brain reset, if you will. We're all kind of operating in a left brain type of world. When I started going in 2017, obviously, it was about the spectacle and the lights and the sounds and people and just kind of that stimulation overload of seeing all these blinky lights and things like that. You get a little jaded after a few years. It's like okay, been there, done that but for me what's what's really special is just the people. My camp that I run we have 90 people from all over the world, every walk of life, every background you can imagine. This is the highlight of their year. This is kind of the pinnacle of what we do. We fly in, or drive in, from all over the world and we make magic happen through food and we bond with this community. That to me is a very nurturing, grounding experience that when we come back in September, in our business September is like New Year's Day, right? That's kind of when the year reboots after the summer. It just gives me a fresh creative perspective and you kind of take a fresher look at everything and, hopefully, it makes for a better product.

[00:07:55] Glen Davidson: Wonderful. Let's bond with the investment community while we still have you. Why don't we start with earnings? Big box retailers are in the news this week. Relative to what we've seen in technology and so on, where do you think they stand?

[00:08:12] Jurrien Timmer: If we go to slide 7, the big story with earnings is that so far with the tariff tantrum it's been the dog that didn't bite. It barked but it didn't bite. You see the black line, that was the second quarter earnings estimate over time for the S&P 500, and that estimate peaked at 68 back in November and, generally, there's a downward drift as you can see from all those squiggles on the chart. In April we got the markdowns because we had the whole April 2nd Liberation Day thing going and then we saw how bad the tariffs could get. Then the numbers got marked down and then we got sort of the tariff story put on hold, we got that 90-day reprieve and then we got the Big Beautiful Bill and the numbers started coming back up again. You can see with that black line that the earnings, the realized earnings number for the second quarter actually jumped four dollars from the estimated number. If we go to the next slide, 8, you could see the same idea but on a calendar year basis, these are the growth rates. You can see the same thing here, the growth rate for 2025 at the beginning of the year was 12.4%, it got marked down to 7.2% in April, May and now it's gotten marked up again to 9.2%. Whether there's another shoe to drop on the earnings side or not we don't know. In terms of the tariff side, I mean, the tariffs are, of course, a tax. Someone's going to be paying for that tax. So far whatever impact we're seeing from tariffs is being offset by the Big Beautiful Bill and just sort of animal spirits in general. That's a good story because valuations are high and you need the earning side to really come through and that's happening in a pretty big way, not only in the U.S. but overseas as well.

[00:10:23] Glen Davidson: Do you feel that the earnings may be impacted by tariffs, though, for a lot of those retailers and eventually passed on to the consumer as an additional tax, really?

[00:10:35] Jurrien Timmer: Our sense, and we've done some work on this internally, our sense is that only one-third of the tariffs have actually been passed through to the economy. Companies front-loaded their imports so they're selling products that didn't have tariffs on them before they do with the ones with the tariffs. We have not felt the full impact yet, or even part of the impact, only about one-third. Our analysis further concludes that of the effects that we're seeing only 10% is borne by the exporting companies. Remember, the political angle for tariffs was, don't worry, we're not paying for it, it's China and other countries that are paying for it. We are definitely not seeing that. We're seeing that only 10% of the cost of this import tax is borne by companies overseas. We don't have a good sense yet how much of the remaining 90% is going to be borne by consumers paying higher prices or by the importers having it cut down into their margins. That, we don't see. Certainly, with the earnings numbers we're not seeing a lot of evidence but, again, it's still early. Of course, with these kinds of things there are always offsets, right, even with the inflationary aspect. You have to measure what consumers would pay more for stuff against how much they're saving from reductions in other prices like oil prices, for instance. It's very hard to really clearly see the impact of something because there's a whole ocean of things going on. So far our sense is that we haven't really seen the full effect yet. It could hit margins but, again, margins could be on the rise for other reasons and it could all be a wash at the end.

[00:12:31] Glen Davidson: As you said, it could be this, could be that. We don't know what we don't know. When it comes to tariffs, obviously, on that Bristol board from quite a few months ago there were some very big numbers floated. That got everybody's attention. Those numbers have come down for the most part. We have some European countries saying, I'm not so happy with the deal that the EU has struck. Do you think that dissension will cause some gyrations on the tariff side?

[00:13:00] Jurrien Timmer: Nobody likes to have tariffs imposed on them. We've seen some of these deals, and whether they're actually deals or just arrangements that let certain sides claim victory, but it's an import tax and someone has to pay for it. Again, I think politically the thinking is that the countries that the tariffs are imposed on are the ones going to be paying the price. That's certainly the political argument. Again, our analysis shows that that's not really the case. It could be that the countries that are complaining may not have that much to complain about and that eventually it's going to be borne [audio cuts out] U.S. consumers.

[00:13:46] Glen Davidson: Keeping with that international theme, you made a comment in a post last week about do we keep focused on the Magnificent Seven and then try and figure out the S&P 493, or do we just say, let's go market weight and then go global, and that's a better way to round out a portfolio. Do you want to talk about that?

[00:14:06] Jurrien Timmer: It's really fascinating because we've talked for several years on this show about will the market broaden beyond the Mag Seven? Will the rest of the S&P 500 participate, could the international rotation that so many of us have been looking for, the global rotation out of U.S. stocks, could that happen in a bullish way where the rests starts participating, or would it be in a negative way where it would come at the expense of the MAG Seven. The Mag Seven are so big that if they go down the market goes down, or the index goes down. It turns out we're kind of getting our cake and eating it too at this point. If we look at slide 2, that's the S&P 500, and you can see that's a very healthy uptrend. The S&P is trading at new highs but that's going to be heavily based on the Mag Seven, which is in slide 9, which continues to be powered by the whole AI boom. You see that the earnings, those three bands are still pointing up. We now have several $4 trillion companies. I think Microsoft and Nvidia alone are now 15% of the S&P. This remains a very top-heavy market. If we go to slide 3 you can see that if you look at the S&P equal-weighted index, obviously, the 500 constituents are weighed equally instead of by cap, you can see it's still a nice uptrend but the S&P, the equal weight is not at a new high, although it might be today, who knows.

[00:15:50] If you look at this chart, this actually is a pretty good looking chart because the trend is up, as it tends to be for equities, the index is at the trend line, so it is not particularly overbought or oversold, and then if you look at the bottom you see the P/E ratio both for the cap-weighted S&P and the purple which is trading at 24 times expected earnings, and the equal-weighted P/E which at 18.3 times earnings. Again, looking just at the equal-weighted now the P/E is one point above its average of 17 but that's hardly nosebleed levels. You look at the SPW, which is the equal-weighted index, you're on trend, the trend is rising, you are not overbought and you're not particularly expensive. The overall market, once you kind of strip out those Mag Seven is actually in pretty good shape. The problem is the Mag Seven are so big that if for some reason the AI boom turns into a bubble, or these companies start losing share of some sort, the overall index is just not going to be able to hold up.

[00:17:01] While we're talking about the U.S., if we look at the non-U.S. market, let's look at slide 11, this is a really good story as well. This is the MSCI All-Country World ex-U-S. Again, a solid uptrend, you're kind of on the trend line and that trend is up whether you measure this index in U.S. dollars, as MSCI tends to do, or in local currency which is the blue line, that trend is up. This is a global bull market now which, really, was not the case for some time. You look in the bottom, 74% of the stocks outside the U. S. are in term uptrends, they're above their 200-day moving average. This is a good story because we want to fish in the biggest possible pond when we are either picking stocks or allocating assets which, of course, the audience on this call does for a living, and you don't want to have to be stuck with just seven companies that's very binary. If they do well you're a hero, if they don't do well you're falling down. The good news is that the rest of the U.S. market looks good, and the rest of the world actually looks pretty good.

[00:18:19] I'll just take this one step further, if you don't mind. If we go to slide 12, one of the things about the U.S. versus non-U.S. dominance over the years has been, and I've been very vocal about that, is that yes, the U.S. is more more expensive. It trades at 22 times earnings, the rest of the world trades at 14 times earnings but that premium was deserved because the U.S. was outpowering the rest of world, not only in terms of earnings but how much of those earnings were returned to shareholders. That's called the payout ratio. You have earnings growth, let's say it's 10%, and if a company or an index has a payout of 70%, so 70% of that earnings number of 10% gets returned to shareholders either as dividends or as share buybacks, that's better than if a company or a  a country grows earnings by 5% and only returns 50% of that 5% to shareholders. That's kind of how the math works and you plug that into a discounted cash flow model. The story has been for years, until very recently, is that the U.S. was outgrowing both developed and non-developed markets and it was also returning a higher percentage of those earnings. It was like a double whammy of the U.S. just dominating everything else, of course, the Mag Seven was a big part of that, but that's changed.

[00:19:55] Emerging markets are still kind of left behind. That blue line in this chart is the payout of EM earnings and the blue bars at the bottom is the payout ratio. The payout hasn't really grown in almost 20 years. It's 37 today, was 40 in 2007. The payout ratio is only 46% and that's  because emerging companies tend to not buy back a lot of shares. If anything, they tend to dilute shareholders because they are emerging companies, they're issuing shares, etc. Now, the U.S., which is the grey line, has grown its payout from $40 in '09 to a much higher level today  and it's paying out about 76% to investors. But look at EAFE, non-U.S. developed stocks in the orange line. That has really shown a lot of growth just in the last year or two. Its payout ratio is actually now higher than in the U.S., it's at 77%. The mix of that payout is different as well. In the U.S. it's about, let's say, a third is dividends, two-thirds is buybacks. In Europe and Japan it's the other way around, it's two-thirds in dividends, one-third in buybacks. The bottom line here is that EAFE is now competitive on both an earnings growth side, a payout side and a payout ratio side.

[00:21:27] If we take that just to one next chart on slide 13, if you put that into a scatter plot, which I always like to do, and we look at the horizontal which is the payout ratio, the per cent of earnings paid back to investors, and the vertical axis is the P/E ratio. The U.S., 76% payout, a 22.5 P/E ratio and the earnings growth, or the growth rate in the payout, the 5-year growth rate is 6%. Now, you look at EAFE, 77% payout, a 14.9 P/E and 10% growth in the 5-year payout. To me, the valuation premium of the U.S. over non-U.S. developed markets is no longer justified. That doesn't mean that the U.S. has to go down because it is fueled by the Mag Seven but it tells me that non-U.S. markets have some room to catch up here by earning a higher multiple. That is a big opportunity for investors who have been kind of stuck having to play the U.S. game for the last 10 years because that was the only place to get returns. Now, again, that pond is bigger and it has more fish in it, and that's a good story.

[00:22:49] Glen Davidson: Interesting comparison, and I can also see how your thought process evolves when you go to Burning Man so that you can create even more interesting charts. Quite a gap there, as you said. Rates will play into that as well. It's been interesting to see the steepening of the yield curve and bets that the Fed is going to reduce interest rates in September. What are your thoughts on where we stand in the next few weeks?

[00:23:14] Jurrien Timmer: The Fed, and the Fed's hard-fought independence over the many decades, obviously, become an issue here as Chair Powell gets ready to at least retire as the Chair of the Fed. We can pull up slide 15 here. The inside scoop, as we all know, is the president doesn't like Powell because he is not dropping rates fast enough. Powell, I think, is doing exactly the right thing by not playing into this game because it's a very dangerous game. The U.S. is the largest economy in the world. It does have still the dominant reserve currency. You can't have shenanigans with central banks not conducting policy in an independent way. When you look at the Fed, the Fed is at 4 3/8, the forward curve expects the Fed to cut rates to about 3 1/4% over the next couple years. I think that's ambitious if the economy remains relatively resilient, which so far it has. The Fed is saying it's going to eventually go to 3%, those are those pink dots there, and inflation right now is at about 2.7. To me, a neutral policy is justified. Inflation has improved. It remains pretty sticky above 2%, it's closer to 3% but at least it's relatively stable there. The volatility of inflation has come down. On the growth side, the economy seems to be neither too hot nor too cold. If you look at the unemployment rate, 4.2%. If we think about what the natural rate of unemployment is, it's also around 4.3%. Labour market seems to in balance. Inflation is stable but above the Fed's target. The Fed could go closer to neutral which, in my view, would be inflation plus 100 basis points. That gets you to 3 3/4. Fed is at 4 3/8 so the Fed can cut several times but not really much more than that. A September rate cut seems to be in the cards. I think that's fine and maybe another one later this year but really not much more than that.

[00:25:32] When the president says the Fed is three percentage points too high, that would imply that the Fed would cut to 1 or 2%. An economy at full employment with inflation above target, there is no way that that's justified. I'm sure the President knows this but he's doing his thing. Where this becomes interesting is that next May Powell steps down as the Chair. He still has two years left after that on the Fed. It's a question of whether he actually resigns from the board as well. The only reason that's important is because if he resigns a new spot opens which can be filled by another White House friendly candidate. There will be some politics around that. In the meantime I think President Trump is about to announce the next, you know, his candidate for Fed Chair. We've got Jackson Hole coming up in a few weeks, or next week even, so we could get into kind of a political theatre, if you will, where the next Chair is announced in the next couple of weeks while the current Chair is still chairing the Fed. For the next six months we could have, essentially, two Fed Chairs, one pro forma Fed Chair and one who is on his way out. It shouldn't have to be a big deal because I think both Fed leaderships, incoming and outgoing, are inclined to lower rates somewhat but the incoming one would want to lower it much more, of course. So there'll be some battling in terms of who has the loudest voice and which one affects the market and how much support that person will have at FOMC meetings. I think we're going to be spending some time in the fall playing these musical chairs at the Fed. It'll be interesting.

[00:27:34] The bottom line, Glen, is that if the Fed were to lower rates more than is warranted two things will happen. You can see the various central bank rates there. If the Fed were to start capitulating to political pressure and falling and dropping rates even further you would imagine, or I would imagine, that the dollar would go down further. That would be outcome number one. Outcome number two would be in slide 18 and that would be the long end of the yield curve. The Fed controls the short end, it does not control the long end unless it is also flexing its power on its balance sheet, which it hasn't been doing for the last couple of years. If the Fed were to lower rates too much, more than is warranted, the yield curve could bear steepen, as we call it, and then you could have yields approaching 5%. I can tell you markets are not going to like that if that happens.

[00:28:49] If it did happen, caused by a rising term premium which you see in the bottom panel there, the Fed probably would have to come back in and use its balance sheet through yield curve control to try to push the long end down. Then all of a sudden, again, this is all theoretical but let's say we're in 2026, Powell is gone, the next person is in, we could have a Fed that's not only easing too much but also flexing its power of its balance sheet by pushing the long end down. Then you get into a pure form of fiscal dominance where fiscal policy dominates and monetary policy kind of plays a more supporting role rather than an independent role. These are all the things we have to contemplate as we navigate the next 3, 6, 12 months.

[00:29:42] Glen Davidson: So many permutations and combinations. Some quick comments on your gold-Bitcoin pairing that you've discussed in the past.

[00:29:51] Jurrien Timmer: Let's go to slide 19. The good news in this new kind of model where the equity market has broadened, the bond market is okay, right? Investors are getting a positive real yield but the bond market could be somewhat impaired as a safety asset, especially if the term premium rises. Then you want to look in a more broader sense of how to construct a portfolio. We can see here the Mag Seven is at the top, Bitcoin is second. You have a whole bunch of international markets that are now doing better than the S&P 500. At the bottom is the dollar and close to the bottom are long-term Treasuries. If we go to the next slide you see Sharpe ratios, which are risk-adjusted returns over the last 52 weeks using weekly data, you can see Treasuries and the dollar are at the, gold, Bitcoin, high yield bonds, various alternatives like market neutral, absolute return, China, emerging markets, they're all very competitive and more so than the S&P. Then you want to look for assets that are, obviously, competitive from a risk-adjusted return perspective but also diversifiers that have low correlations to both stocks and bonds. Gold and Bitcoin definitely fit that bill.

[00:31:21] If we go to slide 23, the way I think about gold and Bitcoin is that I look at gold and Bitcoin on a 4:1 ratio. In other words, if I were, and this is not investment advice, if I were to put a bucket of sort of hard currency, hard money store of value in a portfolio, and let's say that number was 5%, 4 of that 5 would be in gold and one would be in Bitcoin. I do that so that I essentially equalize the volatility of the two assets. If you do that on a 4:1 basis you can see in the top panel that Bitcoin and gold actually are very, very close to each other in terms of their performance and their Sharpe ratios at the bottom are also fairly similar. That's how I look at gold and Bitcoin. They are a play on fiscal dominance. They are a play on a loss of Fed independence, which we don't have yet so I don't want to jump the gun too much. If we go to slide 25, and I know we're running out of time, you can see that Bitcoin is making new highs pretty much as we speak and it's following some pretty good technical patterns here so up and to the right as far as Bitcoin is concerned, as well as gold.

[00:32:39] Glen Davidson: Jurrien, if I recall correctly when you went off for two weeks last year at this time to go to Burning Man it was quite calm in the market for those two weeks. I don't know that that's going to be the case for the two weeks that you're going to be off the grid. How do you get back up to speed when you get at the desk? You're connected to the Global Asset Allocation, you're connected to everything. You have an amazing amount of information coming to you. How do you get up to speed?

[00:33:04] Jurrien Timmer: Slowly.

[00:33:04] Glen Davidson: Makes sense.

[00:33:05] Jurrien Timmer: It is two weeks but it's also the end of August so it is a vacation period, so that's good. Like I said, Labour Day is kind of like New Year's Day in the market. I take the week of Labour Day and I just get back up to speed and I don't rush it. Markets are not going anywhere. If we have good portfolios we can afford to take a few weeks off. Obviously, you're all going to have customers calling. The answer is slowly and that's fine. We all should take some time, especially when markets are, hopefully, quiet to just kind of ground ourselves and reset and take some distance because everything makes more sense when you look at it with fresh eyes.

[00:33:49] Glen Davidson: Thank you, and on behalf of everybody we wish you a safe and happy Burning Man. Safe travels.

[00:33:54] Jurrien Timmer: Thank you very much.

[00:33:55] Glen Davidson: Thank you for joining us. And thank you for joining us. Coming up on Fidelity Connects tomorrow, Ilan Kolet, institutional portfolio manager, will share the latest insights from Fidelity's Global Asset Allocation team, where the team's positioning portfolios for the second half of 2025 and how they're navigating market dynamics across asset classes.

[00:34:11] On Wednesday, Étienne Joncas-Bouchard, Fidelity's Director of ETF and Alternative Strategy, will discuss the current ETF landscape, including an update on Fidelity All-in-One ETFs and why Canada's ETF industry's on track for a banner year to break its annual inflow record. Étienne will appear at 10.30 a.m. Eastern Time for a French-speaking webcast and at 11.30 am in English during our regular Fidelity Connects time.

[00:34:36] On Thursday, portfolio manager for Fidelity Institutional, Jon Knowles, dives into target date funds and how they're thriving this year. He also shares what's behind the momentum and how ClearPath target date funds are helping advisors guide clients through changing markets and life stages. Tuesday and Thursday's webcast will be presented in English with live French interpretation. Thanks for joining us. I'm Glen Davidson. Take care.