FidelityConnects: Jurrien Timmer – The global macro view June 1, 2026

 

 

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Hello, and welcome to Fidelity Connects. I'm Pamela Ritchie.

 

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With a consecutive stretch of weekly equity wins through last week,

 

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not seen in decades, the case for stocks appears bright bullish green.

 

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Tails in the markets catering to both inflation and earnings are pretty

 

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clear and present.

 

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Today's discussion of how realistic the case for a secular bull market

 

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continuation is front and centre.

 

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This secular bull arose out of the ashes of the GFC and

 

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continues to power returns.

 

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The road to how we got here is a journey to be unpacked in order to establish

 

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the odds for continuation.

 

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Joining us here today to cycle you through that journey is Fidelity's Director

 

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of Global Macro, Jurrien Timmer.

 

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Warm welcome to you Jurrien, great to see you, and thank you for your work here

 

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today.

 

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Yes, good morning.

 

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Great to have you here. Everyone can send questions in over the next half hour

 

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or so. Let's take a look at a very powerful last

 

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few weeks but really a very power last several years

 

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that you're taking a look at and how we should be thinking about the

 

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cycle and the cyclical. Where do you want to begin with that?

 

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Yes, where do we begin?

 

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Let's first just start what we've been doing lately is put up slide one, which

 

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is the heat map.

 

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It's interesting because I'm about to hit the road

 

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on an Asia road trip, road show for

 

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our international sister organization, Fidelity International which, of course,

 

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Fidelity Canada is part of.

 

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I'm going to be there three weeks through all kinds of countries meeting with

 

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central banks and sovereign wealth funds.

 

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I'm mentioning this because I wanted to have a slide deck that

 

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is going to be somewhat evergreen and that's going to high level that

 

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CIOs of pension funds will want to

 

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think about. I spent even more time this weekend going through

 

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my entire library of charts and that's where kind of the

 

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note on secular trends emerged from.

 

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We'll get there. If you're possibly able to

 

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read this you can tell that things are pretty calm, actually,

 

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in the market. It's the same fundamental drivers

 

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that have been driving this train. Earnings expectations,

 

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they're now growing at 20%.

 

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Margins are up near 16%.

 

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Credit spreads are down at 72 basis points.

 

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Those three things alone explain almost

 

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everything you need to know about the market in terms of the valuation,

 

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the trend line. The cyclical bull market is now,

 

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we go to slide 2, is now 45 months old.

 

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You can see that it's now good for

 

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a 118% gain over 45

 

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months. That's certainly very impressive.

 

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Is it the most impressive of sort of ...

 

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it is very impressive.

 

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It's not the most impressive. Actually, hold on, I messed up with my

 

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slides over here. I'm going to go back in here and

 

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see if this makes a difference.

 

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Yes, okay, if we go to the next slide, I have to remember

 

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not to move slides around after I sent them to you.

 

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If we move the next slide we can see all the cycles since

 

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1960 on top.

 

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118% over 45 months is very similar to

 

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the last one, actually.

 

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It's very similar, although shy of it, of the one that

 

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started in October of '98, ended in March of 2000.

 

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You can see if you look at the bottom in terms of the concentration risk

 

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a lot of similarities there.

 

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It does raise the question of how is this market

 

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cycle going to end but, more importantly, where are we on

 

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the secular wave and how and when is that going to end?

 

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If it ever does, maybe it doesn't.

 

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That's kind of where I spent a lot of time pondering over the weekend.

 

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I downloaded it all in the war report yesterday so we can

 

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certainly discuss that.

 

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Let's begin a little bit with comparing, as you mentioned there,

 

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the different types of cyclical runs that have been here,

 

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bullish runs. I wonder if you can take us to where

 

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you think the secular market has

 

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begun, not everyone agrees on that one.

 

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No, they don't. We can pull up slide

 

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17.

 

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I'll just say secular bull markets are like

 

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super cycles. They are extra long waves

 

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spanning usually up to 20 years or so of

 

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above average returns. Secular bear markets are interspersed

 

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in between the bull markets, they tend to be around 10, 15 years

 

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and they produce below average or even negative returns.

 

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By definition because these are so long we only have a few of

 

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them. In my sense we had one in the '20s, one

 

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in '50s and '60s, one in the '80s and '90s, and one now

 

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since '09.

 

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I'm kind of a minority among chartists

 

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or technical analysts because in my sense the current

 

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bull market started in '09 and the consensus among

 

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technical analysts is that it started in 2013, because in 2013

 

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we took out the high from '07 and

 

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2000. That was a lost decade, the 2000s.

 

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Once we made a new high in '13 a lot of people think,

 

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okay, that declares a new secular bull.

 

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I don't necessarily disagree with that but for me that point was

 

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the point where a bull market was confirmed.

 

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To me it started in '09.

 

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The reason I come to that is from a variety of different

 

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disciplines, obviously just trend lines and things like that but

 

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also valuation, deviations from trend,

 

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the CAPE model, et cetera.

 

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In this chart I'm showing the 10-year CAGR of the

 

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real S&P. I think it's worth looking at inflation-adjusted numbers

 

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instead of nominal.

 

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I have the deviation from a 150-year trend

 

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line. You can see that 1929 pops

 

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out, 1949, 1982, and 2009.

 

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To me those were the beginnings.

 

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If we go to the next slide of the same chart but showing different

 

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valuation measures, again you see the same thing, '49,

 

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'82, 2009.

 

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If we then go to slide 19 we have the CAPE model, the CAPE model

 

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just says that the 10-year cyclically adjusted P/E

 

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has very little predictive power

 

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over the short term but it has very good predictive power over

 

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the following 10 years.

 

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There you see that we've been following the CAPE model

 

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very well. Those other two periods, '82 to

 

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2000, '49 to '68, all follow that well.

 

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Again, there's no right or wrong.

 

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It's more art than science.

 

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Sample size is tiny but my sense is I feel pretty good that this

 

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started in '09 just like the '82 ...

 

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and there's always gonna be catalysts ... '82 was, of course, inflation

 

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getting broken by Paul Volcker and then launching

 

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a big prosperity era of declining inflation and declining interest

 

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rates. The early '50s, of course, was after the war, after

 

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the Depression, a great new boom time.

 

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The baby boom was there.

 

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Of course, '21 to '29 was just

 

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the roaring '20s that ended up with a bubble.

 

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What's interesting is when you look at the tops, '29,

 

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'68, 2000, and then at some point,

 

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maybe in the next few years, it shows you that

 

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secular bull markets will die from valuation

 

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either because the valuation went to bubble-like levels as it did

 

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in 2029 (sic) or they're not at bubble levels but

 

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they get eroded by inflation which, of course, happened in the late '60s with

 

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the guns and butter era. Then, of course, we had the great inflation in the

 

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'70s. What's interesting about all of that is we're looking at the markets

 

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now, and we've been talking about this for months, basically,

 

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that we have these two tails. We have the right tail of

 

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a massive AI boom that is just causing earnings to explode higher,

 

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margins to get higher and the market's just on fire because

 

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of that.

 

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It makes you wonder will that boom turn into a bubble.

 

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If we look at, where is it, slide 7, you can

 

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see ... I don't think we're in a bubble yet, and maybe we never will be,

 

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but you look at the non-profitable tech stocks,

 

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that's some pretty bullish action. You look at the call-put ratios below

 

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the animal spirits are there, that's your right tail.

 

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The right tail has pulled us out of this Iran conflict, assuming

 

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that it's over, who knows, maybe it's not, because the market

 

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just can't ignore all those earnings that are coming into the

 

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market. On the other side we have the left tail.

 

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The left tail is about interest rates and inflation.

 

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That brings to mind that late '60s top.

 

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So it could be one of those two tails, one is a bubble that

 

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implodes, one is inflation that forces valuations to come

 

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down, or, who knows, maybe it can be both at the same time,

 

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you never know. I would normally say that's too crazy to contemplate

 

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but these days nothing is too crazy to contemplate.

 

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Well, it's fascinating because, as you say, the AI continuity

 

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there has been able to sort of pull us through a very, at least short term,

 

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inflationary time.

 

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The AI piece is supposed to make things deflationary and I guess the

 

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question is can they catch at the right time?

 

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There's lots of people that are either banking on that, or at least hoping for

 

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it. There's no evidence, it appears, at this point to see

 

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that that will happen with any certainty in the future.

 

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Is that fair to say?

 

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That's a great segue to what actually are the

 

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hallmarks of this secular bull. Let me run through a couple

 

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of them and I'll get to that point as well.

 

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If we go to slide 20, if we are wondering

 

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how and when might the secular bull end someday,

 

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hopefully, not some day soon, I'll be glad to be proven wrong on my

 

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timeframe, what are the hallmarks of it?

 

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One, we all know this, of course, is the mega-cap growth super

 

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cycle. You look at the top 50 stocks are now 60% of

 

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the market, the FAANGs, now the Mag-7. We'll have to call it something

 

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else once SpaceX and Anthropic and OpenAI join.

 

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It'll be the trillion dollar club

 

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or whatever, the trillion 10 or something like that.

 

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The market's about to get even more concentrated once those IPOs launch.

 

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I do have a couple of slides on that.

 

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If we go to the next slide, obviously, we have to start with

 

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earnings and margins because if you look at the bottom panel, it's the P/E

 

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ratio and the operating margin for the S&P, those two

 

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move in lockstep. The margin in '09 was 5%,

 

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today it's 15%, 16%, depending on which one you use.

 

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I'm using a different one here than what I showed earlier.

 

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Clearly, the margin story drives the secular bull and

 

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supports the valuations. You look at that CAPE ratio,

 

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we're near the all-time highs but again, credit spreads' margins,

 

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they explain a lot of that.

 

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That will be part of the story as well.

 

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Then slide 22, we show capital flows, this is the US

 

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exceptionalism and that has brought a stronger dollar

 

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with it.

 

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Again, the tariff tantrum a year ago did really nothing to

 

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even break that capital flow.

 

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Remember, a year we were talking about, okay, does this mean we're going to

 

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have repatriation of foreign assets?

 

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It really hasn't happened.

 

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Although you will see on the dollar chart there we're at an interesting

 

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intersection of support and a long term trend line.

 

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A weaker dollar is certainly something we've been talking about

 

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in this era of where geopolitics is becoming more transactional

 

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and the US's role in the world stage is maybe changing

 

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or eroding.

 

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Now, let me get to the good bit here.

 

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If we go to the next slide, 23, we can see financial engineering.

 

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This is something I've been writing about for a long time.

 

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I think it's often not really appreciated

 

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how big a factor this is.

 

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We know that we're going to get these three big IPOs.

 

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We look at this chart, below the horizontal axis is the

 

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cumulative IPOs and secondaries since '09.

 

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'09 started the financial engineering era.

 

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It started, obviously, the QE zero interest rate era, heavy-handed

 

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central banks, things like that.

 

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3.5 trillion of new issue, you compare that to the

 

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retirement of shares either through M&A or buybacks,

 

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it's about 30 trillion.

 

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There's almost a 10 to 1 imbalance between the demand

 

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for shares from within the corporate sector and

 

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the supply of shares.

 

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That, I think, really explains a lot of why the returns have been

 

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so outsized because it's supply and demand.

 

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Here's where the nuances come in.

 

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If we go to slide 24 you can see

 

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that as a percentage of earnings dividends and

 

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buybacks are now losing share, if you will,

 

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because CapEx is cannibalizing it.

 

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These companies, the Mag-7

 

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[crosstalk].

 

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They can't give it back.

 

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Investors like Will Danoff would say, well, if you've got too much gas just

 

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give it back to us through buybacks, which is exactly what they did.

 

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But now they're using the cash on CapEx and there's less cash so

 

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it's at the expense of buybacks.

 

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It's not the end of the world but buybacks

 

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clearly affect valuations.

 

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Again, this, at the edge, is maybe a subtle hint that

 

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maybe the financial engineering era is cresting.

 

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Then we'll add the IPO side.

 

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If we flip over to 28, this is interesting.

 

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We're going to have SpaceX, OpenAI, Anthropic.

 

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Together, it's like $3 or $4 trillion worth of companies.

 

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At first glance, I'm like, oh my God, how is the market ever going to absorb

 

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that?

 

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My colleague Pierre said, no, no, the actual float

 

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coming into the market is about 300 to 400 billion and not 4

 

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trillion.

 

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Elon can't just sell all his stock tomorrow.

 

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If you add 300 to 400 trillion you get to where that star is.

 

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That's a big deal but it's not like

 

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ten standard deviations from historical norm.

 

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It'll be a big, it'll be a lot.

 

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If we go to the next slide, still

 

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we have to look at IPOs against the

 

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demand for shares. Where that star is is where the

 

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IPOs would come. It would be one of the biggest IPOs events ever.

 

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You look at the two periods there highlighted, one

 

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was 2000. That is when IPOs come into

 

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the system. The other one was 2021 when we had

 

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a little asset bubble coming from all the demand from

 

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the fiscal stimulus and then the Fed being, and other central banks,

 

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way too accommodative.

 

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It would be possibly a bell ringing event, but

 

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only possibly. That's kind of how I think about putting

 

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all these things together.

 

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I know you asked about inflation.

 

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Let me just go to slide 26 real quick and talk

 

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about what the left tail could look like.

 

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Here's the Bloomberg Commodity Spot

 

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Index. We're all familiar with the BCOM, which is the commodities

 

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index, but that one includes all kinds of roll yields because

 

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investors will buy products linked to

 

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that. The spot index is just spot prices, oil, gold,

 

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copper, what have you.

 

17:45.898 --> 17:49.902

You can see that until recently the TIPS breakeven was

 

17:49.902 --> 17:53.739

perfectly aligned with the BCOM SP.

 

17:53.739 --> 17:58.677

Now the commodities are at new highs because of oil

 

17:58.677 --> 18:03.649

and the TIPS breakevens are just sitting there like nothing to see here.

 

18:03.649 --> 18:05.851

One of these two is going to be wrong.

 

18:05.851 --> 18:09.855

I don't know which one it's going to be. If the war ends tomorrow

 

18:09.855 --> 18:14.026

and the Strait of Hormuz opens up oil will go back to $60,

 

18:14.026 --> 18:18.297

$70, $80 and maybe the black line comes down and

 

18:18.297 --> 18:20.866

the TIPS breakevens will be right.

 

18:20.866 --> 18:24.837

It's an interesting conundrum because we have

 

18:24.837 --> 18:28.540

other bits of information. If we go to slide 25 it looks to me...

 

18:28.540 --> 18:32.044

I mean, that doesn't, sorry to interrupt, that doesn't look like that's

 

18:32.044 --> 18:33.879

happened very often at all.

 

18:33.879 --> 18:34.213

That's pretty...

 

18:34.213 --> 18:35.914

No. It's rare.

 

18:35.914 --> 18:40.018

In 2022 when oil prices spiked the

 

18:40.018 --> 18:43.789

TIPS breakevens went right with it, as they should.

 

18:43.789 --> 18:48.060

This time the bond market is saying, no, this will all be coming back

 

18:48.060 --> 18:50.195

to normal.

 

18:50.195 --> 18:54.900

The Fed is now on watch, expectations are that the Fed will

 

18:54.900 --> 18:58.804

have to raise rates, although that's just a snapshot in time.

 

18:58.804 --> 19:02.774

The 10-year yield did bounce up above 4 1/2 a few weeks

 

19:02.774 --> 19:07.746

ago and it immediately had an impact on the stock market.

 

19:07.746 --> 19:12.284

Here's the super cycle for commodities. That's in a secular bull market.

 

19:12.284 --> 19:16.155

What's interesting about that is that usually, if you look at the 10-year CAGRS

 

19:16.155 --> 19:20.092

at the bottom, usually commodities are

 

19:20.092 --> 19:23.896

the opposite of stocks which kind of makes because commodities are an inflation

 

19:23.896 --> 19:27.833

play and financial assets do not like inflation,

 

19:27.833 --> 19:30.302

whether it's stocks or bonds.

 

19:30.302 --> 19:34.439

They are now apparently both in a secular bull market, which is fairly

 

19:34.439 --> 19:38.677

rare. Are the commodities

 

19:38.677 --> 19:43.415

giving us an early warning sign that the left tail of higher inflation,

 

19:43.415 --> 19:48.654

higher rates, tighter Fed policy are gonna have an impact on valuation,

 

19:48.654 --> 19:52.157

just as the right tail are boosting valuation.

 

19:52.157 --> 19:56.461

It's a real interesting conundrum to how do we manage

 

19:56.461 --> 19:58.931

a portfolio where you have both tails ...

 

19:58.931 --> 20:02.901

there's always tails lurking but imagine

 

20:02.901 --> 20:07.172

if they both are active at the same time, which they're kind of

 

20:07.172 --> 20:09.408

starting to do.

 

20:09.408 --> 20:13.679

Maybe that'll be the last few innings, or maybe that will be the

 

20:13.679 --> 20:16.882

extra innings for the secular bull.

 

20:16.882 --> 20:21.019

Those are the things I'm watching as to, okay, we know when and how

 

20:21.019 --> 20:25.190

it started, we know what the drivers are and we know what usually

 

20:25.190 --> 20:29.528

ends them so let's look at those factors and see where they are

 

20:29.528 --> 20:33.932

in the span of history to see when and how this one might end.

 

20:33.932 --> 20:37.836

Again, hopefully it doesn't end anytime soon because it's nice to get all that

 

20:37.836 --> 20:41.807

beta because it kind of fast

 

20:41.807 --> 20:45.777

forwards. We can over-earn the things we need to achieve

 

20:45.777 --> 20:49.848

when we're saving for retirement or our advisors are helping

 

20:49.848 --> 20:52.417

their clients save for retirement.

 

20:52.417 --> 20:56.421

You want to get those harvests while they're going strong.

 

20:56.421 --> 21:00.292

There's a great question coming in here. Can you comment on the widening

 

21:00.292 --> 21:04.263

divergence between CPI and PCE in the

 

21:04.263 --> 21:07.866

US? We're watching inflation pretty closely right now.

 

21:07.899 --> 21:12.371

What do you think of that?

 

21:12.371 --> 21:16.375

They're correlated over time.

 

21:16.375 --> 21:18.510

They have different compositions, of course.

 

21:18.510 --> 21:22.014

The Fed tends to favour the PCE.

 

21:22.014 --> 21:26.051

The CPI is an index that never changes

 

21:26.051 --> 21:30.522

... well, it can change but it never retroactively changes because

 

21:30.522 --> 21:33.492

cost of living adjustments are tied to it.

 

21:33.492 --> 21:37.696

They're just different compositions. What I think is more interesting is that

 

21:37.696 --> 21:42.034

we tend to look at things ex food and energy because they're volatile.

 

21:42.034 --> 21:46.004

If we look at the things that are really plaguing people

 

21:46.004 --> 21:48.940

since COVID it's certainly food.

 

21:48.940 --> 21:52.978

We can't really strip those things

 

21:52.978 --> 21:56.915

out anymore. Energy as well, I mean, we're less energy dependent than we used

 

21:56.915 --> 22:01.386

to be. The things we tend to exclude are

 

22:01.386 --> 22:05.457

the things that are actually driving this K-shaped economy these

 

22:05.457 --> 22:09.695

days. I don't think we can really exclude them anymore.

 

22:09.695 --> 22:13.065

There's also not a lot that the Fed can really do about it.

 

22:13.065 --> 22:17.169

Are they gonna tighten policy because food and energy prices

 

22:17.169 --> 22:21.139

are high? These are necessities that people consume,

 

22:21.139 --> 22:23.642

these are not luxury cars.

 

22:23.642 --> 22:28.513

It's a little bit of a dilemma.

 

22:28.513 --> 22:32.617

Sticky inflation is a real issue,

 

22:32.617 --> 22:36.722

we can pull up slide 34 for a second, hopefully, whatever

 

22:36.722 --> 22:40.692

we're seeing on the good side of inflation, as you

 

22:40.692 --> 22:44.696

pointed out earlier can be offset by the

 

22:44.696 --> 22:49.101

AI promise. Certainly, the promises seem to be

 

22:49.101 --> 22:53.972

compelling, productivity, certainly earnings, efficiencies,

 

22:53.972 --> 22:57.909

hopefully, cost reductions come with it so that at least the two

 

22:57.909 --> 23:00.145

can offset each other.

 

23:00.145 --> 23:04.316

Here's the inflation, the 5-year inflation rate, this is the CPI

 

23:04.316 --> 23:07.786

in the bottom, and the Fed policy rate.

 

23:07.786 --> 23:11.523

You can see that the Fed has been easing, of course, even though the 5-year

 

23:11.523 --> 23:14.926

inflation rate has been rising.

 

23:14.926 --> 23:19.464

A Fed, not only not being able to ease policy

 

23:19.464 --> 23:24.069

any further but having to be kind of on its back heels to

 

23:24.069 --> 23:28.173

raise rates is not what was on the market's bingo card at the beginning

 

23:28.173 --> 23:32.677

of the year. It certainly wasn't on Scott Bessent's

 

23:32.677 --> 23:36.848

preferred list, or Kevin Warsh.

 

23:36.848 --> 23:41.286

It'll be an interesting thing to watch and to see how it affects multiples

 

23:41.286 --> 23:45.424

but it's a reminder that the Fed model rules when

 

23:45.424 --> 23:49.728

the risk-free rate is competitive with

 

23:49.728 --> 23:50.929

the risky asset.

 

23:50.929 --> 23:57.335

That's slide 27, not to bombard you all with so many slides, the

 

23:57.335 --> 24:02.274

bars is the S&P 500 P/E, it's at around 22,

 

24:02.274 --> 24:06.311

the black bars are the Treasury P/E, so the

 

24:06.311 --> 24:10.348

inverse of the yield, you can see that the Fed

 

24:10.348 --> 24:15.120

model doesn't really count when

 

24:15.120 --> 24:18.824

the risk-free rate is not competitive, as has been the case.

 

24:18.824 --> 24:22.928

The bond P/E for years has been well above the equity

 

24:22.928 --> 24:25.330

P/E. What happens on the bond market?

 

24:25.330 --> 24:27.466

It matters but it doesn't matter as much.

 

24:27.466 --> 24:31.736

Once those two yields converge and they're the same

 

24:31.736 --> 24:35.740

it matters a lot. That's why 4.5% is

 

24:35.740 --> 24:37.476

like the magic number right now.

 

24:37.476 --> 24:40.345

Not that there's anything special about 4.5%.

 

24:40.345 --> 24:44.483

It could be 4, it could be 6, it can be 3, but 4.5 is what the

 

24:44.483 --> 24:47.652

yield is on stocks and what the yield is on bonds.

 

24:47.652 --> 24:49.488

That's why it matters.

 

24:49.488 --> 24:53.558

If we go from 4.5 to 5 the equity P/E probably comes down

 

24:53.558 --> 24:58.330

3 or 4 points. That's how that model works.

 

24:58.330 --> 25:02.767

It is sort of incredible, the competitive nature of the two for investors

 

25:02.767 --> 25:06.872

when ultimately there's yield on the other side, you take a look.

 

25:06.872 --> 25:10.041

Can you come back to the US exceptionalism story?

 

25:10.041 --> 25:14.112

I'm just curious, through other secular bull markets, when you go back through,

 

25:14.112 --> 25:18.116

I think even back to the '20s, wasn't US

 

25:18.116 --> 25:22.654

exceptionalism a very large part of that always

 

25:22.654 --> 25:24.856

when you look sort of an international?

 

25:24.856 --> 25:29.594

We're talking a lot more about international diversification at this point.

 

25:29.594 --> 25:33.632

US exceptionalism and that driving the global markets has been around

 

25:33.632 --> 25:37.102

through many secular bull markets, has it not?

 

25:37.102 --> 25:41.406

Absolutely. We can pull slide 18 up again.

 

25:41.406 --> 25:47.546

Yeah, for sure. The Roaring '20s, of course, back in the day, I mean,

 

25:47.546 --> 25:52.584

it used to be Britain, then it became the US during

 

25:52.584 --> 25:56.755

the early part of the last century. The pound collapsed and

 

25:56.755 --> 26:00.325

the US became the dollar standard of the world.

 

26:00.325 --> 26:04.763

Everything was based on the gold standard.

 

26:04.763 --> 26:08.733

In the Bretton Woods era every currency got pegged to the

 

26:08.733 --> 26:12.170

US dollar and the US dollar was pegged to gold.

 

26:12.170 --> 26:17.375

Then, of course, it became a free floating exchange system.

 

26:17.375 --> 26:22.681

The '20s, obviously, the Roaring '20s was US

 

26:22.681 --> 26:24.382

exceptionalism in some sense.

 

26:24.382 --> 26:28.320

The '50s, of course, clearly, the US was rebuilding the rest

 

26:28.320 --> 26:31.022

of the world, the Marshall Plan, all that stuff.

 

26:31.022 --> 26:34.626

You had the baby boom. That was really the heyday.

 

26:34.626 --> 26:38.630

You got like the suburbanization of the

 

26:38.630 --> 26:42.801

country. The '80s

 

26:42.801 --> 26:46.871

and '90s, I don't know if that was necessarily US exceptionalism but

 

26:46.871 --> 26:50.942

it was global disinflation. Then in the 2000s the

 

26:50.942 --> 26:56.081

world really globalized and now it's becoming multi-polarized.

 

26:56.081 --> 27:00.285

Certainly, the '50s and early '60s and the '20s were periods

 

27:00.285 --> 27:02.354

of US exceptionalism.

 

27:02.354 --> 27:06.491

Valuation being the key thing that

 

27:06.491 --> 27:10.595

plummets at the end of a secular bull market, which you've mentioned,

 

27:10.595 --> 27:12.597

but valuations look pretty good.

 

27:12.597 --> 27:16.501

I know that we have these tails and we're talking about them but as you say,

 

27:16.501 --> 27:20.605

you did last week, price between earnings and valuation.

 

27:20.605 --> 27:24.843

Things were looking very steady there and even further out

 

27:24.843 --> 27:28.546

from there. I guess just walk us through the valuation story.

 

27:28.546 --> 27:31.349

It seems solid.

 

27:31.349 --> 27:35.387

If we pull up slide 12, valuations right now are steady for

 

27:35.387 --> 27:38.189

the simple reason that earnings are growing so fast.

 

27:38.189 --> 27:42.460

Earnings are going at 20%, which is

 

27:42.460 --> 27:44.129

remarkable.

 

27:44.129 --> 27:48.667

The market is up but because earnings are up so much the valuation

 

27:48.667 --> 27:51.803

side isn't really moving that much.

 

27:51.803 --> 27:56.107

Again, I come back to margins and credit spreads and

 

27:56.107 --> 27:59.477

earnings. Earnings and margins are kind of the same thing.

 

27:59.477 --> 28:03.748

If you just look at margins and spreads over time

 

28:03.748 --> 28:08.887

and you do a regression against price and against valuation

 

28:08.887 --> 28:12.724

you will see that they explain most of what's happening.

 

28:12.724 --> 28:15.694

The top panel is the price index.

 

28:15.694 --> 28:19.130

The bottom panel is the 5-year CAPE ratio.

 

28:19.130 --> 28:23.468

I tend to like 5 over 10 because it encompasses a

 

28:23.468 --> 28:27.439

full cycle. You can see how the tech bubble stood out because it was

 

28:27.439 --> 28:30.241

not explainable by these fundamentals.

 

28:30.241 --> 28:33.978

It was truly a bubble. Bubbles are gonna be irrational and they cannot be

 

28:33.978 --> 28:36.347

explained by the fundamentals.

 

28:36.347 --> 28:39.217

You compare the tech bubble to now and they're totally different.

 

28:39.217 --> 28:43.188

Right now you can explain the price action through

 

28:43.188 --> 28:45.223

margins and credit spreads.

 

28:45.223 --> 28:49.694

The only fly in the ointment is if you add then bond

 

28:49.694 --> 28:54.299

yields to them, which is the blue line in both of those panels,

 

28:54.299 --> 28:58.336

now all of a sudden the P/E is over its skis.

 

28:58.336 --> 29:01.740

That's the Fed model rearing its ugly head.

 

29:01.740 --> 29:06.077

That's why my sense is if this thing ever ends

 

29:06.077 --> 29:10.148

there's gonna be a spread between what is fundamentally justified

 

29:10.148 --> 29:13.485

and where the actual market is trading.

 

29:13.485 --> 29:17.489

It could be a bubble where the P/Es just go to levels that are

 

29:17.489 --> 29:22.060

not rational, like what happened in the tech bubble, or

 

29:22.060 --> 29:26.498

it could be like what happened in the '60s and '70s where it was higher

 

29:26.498 --> 29:31.136

rates and higher inflation that pulled down the valuation

 

29:31.136 --> 29:33.638

even though earnings are fine.

 

29:33.638 --> 29:38.276

Those are the two kind of tails that I look at as we sort of ponder the

 

29:38.276 --> 29:40.378

final innings here.

 

29:40.378 --> 29:44.015

We've got quite a lot of info out this week, economic data.

 

29:44.015 --> 29:47.418

Friday really is the big one, the jobs report.

 

29:47.418 --> 29:49.387

You're looking higher level, longer term.

 

29:49.387 --> 29:52.056

Is there something in this week that you wanted to point out to investors as we

 

29:52.056 --> 29:54.058

close?

 

29:54.058 --> 29:58.463

Well, we're looking, of course, for hints that the

 

29:58.463 --> 30:01.833

AI boom is not creating a jobless expansion.

 

30:01.833 --> 30:04.869

So far there's really no evidence that it is.

 

30:04.869 --> 30:09.908

The jobs numbers have been stronger lately.

 

30:09.908 --> 30:14.078

You're looking for little signs of that and you're looking for

 

30:14.078 --> 30:15.780

wages.

 

30:15.780 --> 30:22.320

We know that prices are up about 30% since 2020 so

 

30:22.320 --> 30:26.457

we want to get a sense of that inflation. If inflation is sticky are wages

 

30:26.457 --> 30:30.461

at least holding on. Those will be the things that

 

30:30.461 --> 30:32.730

I look for.

 

30:32.730 --> 30:35.567

Jurrien Timmer, thank you for sharing with us what you're about to go to Asia

 

30:35.567 --> 30:38.903

and share with very high level pension managers and so on.

 

30:38.903 --> 30:42.073

We're delighted, as always, to have you and thank you for sharing your

 

30:42.073 --> 30:43.541

knowledge.

 

30:43.541 --> 30:45.009

Well, thank you very much.

 

30:45.009 --> 30:48.947

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30:48.947 --> 30:53.084

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