FidelityConnects: Jurrien Timmer – The global macro view November 10, 2025

[00:03:23] Alex Gabrini: Hello, and welcome to Fidelity Connects. I'm Alex Gabrini, Vice President of Regional Sales. North American equity markets are off to a strong start this week as Congress begins steps to end a government shutdown. Investors are also encouraged by a surprisingly strong earnings season. The momentum looks good overseas too with non-U.S. markets showing accelerating earnings estimates and strong performance. The big question now is whether markets have overestimated AI's ability to drive long term growth and help the U.S. manage its rising debt. What does this mean for investors and how might it shape the path ahead? Joining me now to unpack the latest macro movers impacting the markets is Fidelity Director of Global Macro, Jurrien Timmer. Good morning, Jurrien.

[00:04:07] Jurrien Timmer: Good morning. Welcome to the show.

[00:04:10] Alex Gabrini: Thank you. Equity markets ended the week last week down across major benchmarks. The NASDAQ posted its worst weekly drop since April. Technology AI names were key drivers of the slide despite some strong results from companies like Palantir yet today we're seeing a reversal of the slide with the news that there's light at the end of the tunnel for the government shutdown. Does the drop last week in tech AI names suggest to you that there is vulnerability in the current market leadership and in the AI story?

[00:04:41] Jurrien Timmer: Not really but what we tend to see when you have a very compelling narrative that is driving investor enthusiasm, let's put it that way, and if that enthusiasm finds its way not just in the big stocks, the Mag Seven, but also in what I would call the cats and dogs of the AI story, companies that may not have any earnings but make promises. When you get into that sort of exuberant mode you will see a lot of corrections. They could be big or they could be short-lived. I mean, it looks like this one is already being reversed today but that's sort of par for the course. You tend to see that. We saw that in the late '90s. The big bellwether stocks like Dell and Cisco, they had countless corrections of 20, even 30%. It just shows that the stakes are high because these are crowded positions, a lot of people have them, and they won't hesitate to take profits if any of the headlines become Less favourable.

[00:05:47]  I think what we saw the last week or two is that some of these stocks were a little bit elevated. I think the meme stock basket that Goldman Sachs has was trading at a 280 P/E. These things get kind of silly and therefore when they start correcting it can take on a life of its own. When the trend is positive and the story is compelling, we have the earnings story, we have the AI story, we have a relatively benign interest rate environment with the Fed and bond yields down, there's a lot to like about the market but other people see that too and so they're in it and you get these corrections whenever something goes the other way. The fundamentals will ultimately prevail. I think one view of earnings season that's kind of wrapping up now is that there is a very powerful earnings momentum for this market.

[00:06:46] Alex Gabrini: Right, appreciate that. So par for the course with a correction like that. You argue that the market sits at a critical inflection point. On one side you have a powerful AI narrative, as you spoke about, a cooperative Fed, solid earnings in CapEx. On the other hand you have top-heavy market leadership, you have concentration, mediocre breadth, maybe some frothy expectations for AI-driven ROI. You described sort of a narrow path between the two. Can you tell us more about what you mean in terms of these two tails?

[00:07:22] Jurrien Timmer: If you look at market performance historically it tends to be a bell curve distribution, as many things in life are. Generally, you're in the middle somewhere between those outside tails of so many standard deviations away from the norm. That's by definition where we spend most of the time otherwise it wouldn't be a bell curve distribution. There's always a left tail out there most of time. Investors would think about a recession as a left tail or a geopolitical shock or sharply rising interest rates, for instance. On the right tail you have a boom, like what we're seeing right now, a compelling technological innovation or just very strong earnings and powerful momentum. Those are the two tails.

[00:08:19] Normally, you're sort of in the middle but this is anything but a normal cycle, especially 2025. I think the market is sort of lurching from one tail to the other. After the election a year ago the markets priced in a right till outcome. Then in March of this year with the tariff situation the markets priced in a left tail. Then the tariff sort of went on the back burner a little bit and we got the One Big Beautiful Bill and the AI momentum really skyrocketed. Now we're back on the right tail and that right tail is further held by the fact that the Fed is cutting rates and long yields are very well behaved. We're kind of threading that needle but not without sort of lurching back and forth.

[00:09:10] Right now the way I would describe the tails is, obviously, the right tail is that the promise of AI is delivered, meaning that the AI productivity that comes out of all of this CapEx that is being invested will yield the result that the world needs, or at least the U.S. needs, which is that the speed limit for the economy, the rate at which the economy can grow without generating excess inflation, that that speed limit goes up high enough that the debt ... of course, we all are burdened with, including Canada, Europe, China, Japan, the UK, the U.S., but if the growth rate is high enough the debt becomes sustainable. You think about it, if you take out a loan to start a business and the loan costs 5% but your business is growing at 20% that was a good use of a loan.

[00:10:12] Right now around the world there isn't a lot of growth because there's an immigration backlash almost everywhere in the world including, obviously, the U.S. but even Canada, Europe, and you have slow growth in the labour force because of demographics and you haven't seen a lot of productivity. The right tail is that the trillions of dollars spent on AI CapEx yield an ROI that is so good that the economy can reach, I guess you can call it escape velocity. Then all of a sudden the debt becomes sustainable and you can have growth without inflation. That is the ... I don't know if it's pie in the sky but that's the right till scenario. In that scenario the Fed wouldn't have to raise rates because, again, that non-inflationary run rate goes up. That kind of boom story can easily become a bubble story, the way the internet boom did back in the mid-'90s became an internet bubble in the late '90s.

[00:11:20] That's not a prediction on my side but everybody I talk to is asking and wondering about whether we'll have a bubble. Ironically, if you go from a boom, which is the right tail, to a bubble then eventually that bubble takes you back to the left tail because then you have the aftermath of the bubble which is never pretty. That's kind of one way I would describe the tails. The left tail would be if we end up getting a bubble but you would go to the right tail first. The other left tail, the way I see it now that the tariff story is a little bit reduced as a threat after the truce between the U.S. and China, but the left tail story would be that the boom does not deliver that rising speed limit and we get into that whole debt cliff, if you will, where bond yields start to rise and all of a sudden you're knocking on the door of a 5% 10-year yield. Markets definitely wouldn't like that. Also, if the Fed were to lose its independence, if the Trump administration manages to flip the Fed, as I call it, and it drives rates below the inflation rate then you could get inflation producing a bare curve steepening. That would be another iteration of the left tail.

[00:12:44] Right now, it's all pretty good. Earnings season is wrapping up, the numbers are good, valuations are high but I think as long as earnings are delivering investors tend to overlook valuations. That's how I see the tail. I did want to mention one more, and you mentioned this already, but concentration risk in the market, in the U.S. market, is definitely a real thing. Mag Seven or the top 10 stocks are above 40% of the market. If that ever were to go in the other direction, things never keep going indefinitely, then just those seven stocks going down would drag the market down as well. That is definitely a tail risk. I don't think it's an imminent tail risk but it is a tail risk and then you really need to be diversified so that you avoid that concentration risk.

[00:13:57] Alex Gabrini: Perfect, and we'll get into some of the ways that you suggest obtaining that diversification but let's dig into the data a little bit. This week we heard fresh concerns about inflated valuations, especially with the AI semiconductor names. We had warnings of possible drawdowns, 10% to 15% from senior bank executives, yet you point out that earnings growth was revised up again last week. Can you help us make sense of the data and maybe interpret whether or not the market is, in fact, over its keys at this moment.

[00:14:30] Jurrien Timmer: Let's start with slide 2, that just highlights earnings season which definitely has been a very, very good one. We all know the story, the earnings estimates, and in this chart I show the growth rate estimates. This is from Wall Street analysts. Generally, as you progress through the year and you approach the earnings season, the earnings quarter, if you will, the lines come down because companies tend to guide down. The estimates generally start too high and then companies sort of under-promise, if you will, guide the estimates lower When you get to the earnings season, which is the vertical line, there's inevitably a bounce. Companies, they under-promise and over-deliver. That's the oldest game in the book and it's always a question of, okay, by how much are companies beating, the ones that are beating them by a lot get rewarded and the ones that don't get punished. Typically, the growth rate bounces by about 300 basis points. You can see that in the chart. You can see that little hockey stick bounce there.

[00:15:42] The last few quarters, however, have produced a much greater than average bounce and this one certainly has been that way as well. The growth rate started at 7% and it really hadn't declined very much in recent months. It is now up to 15%. That is an 800 basis points bounce which is generally much higher than normal. Whether that's the One Big Beautiful Bill, all the CapEx expensing that's in that One Big Beautiful Bill, or the AI boom, it's probably a combination of both of those, but that bounce is actually lifting the year, the calendar year number, which is on page 3. Remember, we started the year with analysts expecting a 12.5% earnings growth. The tariff tantrum back in March and April caused analysts to mark down their estimates from 12% to 7%. Since then they've been marked back up and we're now at 11.5% which is almost where we started the year. It's actually already ahead of where we ended last year which was at 11.4%.

[00:16:57] This is a very bullish story and it is rare for the numbers to go up during the year. Generally, you have that downward drift. Clearly, there is a lot of momentum on the earnings front and that is allowing the market to kind of look through the valuation a bit. If we go to slide 6, I did a little back of the envelope math exercise over the weekend to show, okay, what is actually priced in in terms of earnings? What does the market need to see for it to not be over its skis? This gets into the discounted cash flow model which is a really great too but it's complicated because there's way too many variables in it. Basically, when you look at the market and you look at what the earnings growth projections are and if you look at the estimates for the next few years the expectation is that earnings will grow 11% a year over the next 5 years, which is actually right in line with what the realized growth rate was in '24 and probably will be in 2025. That's pretty solid, that's not crazy.

[00:18:14] But in the DCF you solve for, okay, if the price of the index is at the correct level  and the earnings growth is X and we know where interest rates are then at what equity risk premium does the current value make sense? When you solve for it that way the equity premium right now that is implied in that 11% earnings growth is 3.7%. That may not seem that low but if we go to slide 5 you can see that it is definitely below average. If you go to the bottom panel there you see that the grey line, the historically realized risk premium that investors get from investing in equities over the risk-free asset, is about 5%. The average of the implied, so not the realised but the implied risk premium, is around 5%. Right now we are well below that.

[00:19:14] If we go back to slide 6 for a moment the math exercise is that, okay, let's say the market is normally valued at a risk premium that is the average around 5% instead of 3.7%, what would earnings growth need to be to justify the current S&P 500 level of about 6,730? The answer is 18% growth. Again, the only way the market makes sense at an 11% growth rate for earnings is if the risk premium is below average. If the risk premium was at average you would need to see 18% growth in earnings to justify current levels. That doesn't mean the market's going to crash or fall 20% because it's over its skis but it shows you that the market needs a lot of ongoing momentum from earnings to justify its current price. Maybe we'll get that, maybe this AI boom does deliver but it shows you that the market is priced for success here.

[00:20:24] Alex Gabrini: Fair enough. The U.S. government shutdown has deprived investors of a lot of the country's most important economic data over the last month or so. We have seen some economic data come through. Consumer confidence dropped to its lowest level in years, the labour market is showing signs of stress with a rise in layoffs. Given that backdrop how confident are you in the earnings thesis over the next three to six months and how do you factor labour market risk into all of this?

[00:20:57] Jurrien Timmer: I think the earnings story is pretty robust. I'm not really questioning it because of the lack of economic data. We have our own internal earnings projections from a company by company level and we're actually fairly enthusiastic about companies' earnings as well. We have had a dearth, of course, of data since August, I guess it was, but there are real time indicators that we can look at. For instance, we don't have the inflation data but there's a series called truflation which is a blockchain-based algorithm that scans millions of SKUs every day, it's actually a daily indicator, and that's running at about 2.7%. That's in line with where the government posted inflation data are.

[00:21:53] The jobs market has been soft, as we know, and we haven't gotten a payroll report in a few months. We have seen some layoffs but I would say the jobs market is sort of in a detente where companies are not really hiring but they're not really firing, other than those layoffs. Again, there are state-by-state level indicators. We have jobless claims which are posted every week. We have the JOLTS report, we have our own proprietary indicator because Fidelity administers so many benefits plans so we can see a good section of the economy in terms of what we see in companies posting declining or rising benefits.

[00:22:43] By no means is the economy sort of on the brink or falling off a cliff or anything. I think even if the numbers come in weaker on the payroll side, which they probably will, I think the market is relieved that we're at least moving back out of this shutdown. Current indications, as you mentioned, are more constructive on that side. I hope the shutdown ends soon because we want our air traffic controllers to get paid because as someone who travels frequently it hasn't been a pleasant story the last few weeks.

[00:23:20] Alex Gabrini: I'm sure you want access to the data that you normally utilize although it doesn't sound like you're missing it too much with all the access to proprietary data that we have. You mentioned the concentration risk, the very real concentration risk earlier on in the show. You've emphasized the value of global diversification to help combat that concentration risk. What allocation shifts make sense today given that environment? Maybe talk about the international markets and how we should be thinking about exposure there.

[00:23:52] Jurrien Timmer: If we go to slide 12, most of you are familiar with my thesis that we're living in sort of a post-60/40 world where the 60, obviously, is the anchor for any long term portfolio but the U.S. side of that 60 does have concentration risk, it has valuation risk, it has that risk of a boom becoming a bubble which is a risk that you don't really see in many other parts of the world because they don't have the same story. The 60, I think, is still the 60 but maybe more of a global 60 than a U.S. based 60. The global story is very compelling. Actually, if we go to slide 4 real quick before we go back to this one, non-U.S. markets are now outperforming the U.S. by 800 basis points on a year-over-year basis. That is the highest in almost 10 years. That's a very good story.

[00:24:53] Again, especially non-U.S. developed stocks are very competitive now with the cap-weighted S&P. The growth in the payout, that share of earnings coming from dividends are being returned to investors as dividends or buybacks, is actually growing faster in the EAFE Index. The payout ratio is the same, 75%, yet its P/E is at 15 whereas our P/E in the U.S. is 23. So very, very compelling story. If we go back to 12 for a second, the 60 is the 60 and you can see in this chart I'm showing the correlation of the asset classes that I track either against the S&P 500, that's the vertical scale so all of those dots you see at the top are essentially equity asset classes and you can see that they're generally highly correlated to the stock market, as you would expect.

[00:25:53] The correlation to the bond market, to long term Treasuries, is shown across the horizontal scale. You can see, for instance, long term Treasuries by definition are 100% correlated to the long term Treasury Index. Those are kind of the two binary parts of a portfolio. The 60 is equities, more global. The 40 would normally be bonds but I don't really like bonds here. I think at a 4% yield there's probably more upside risk to yields than downside so I would tread lightly on the Treasury or on the bond side. That leaves you with what we call diversifiers. Those are asset classes with neither a strong correlation to equities nor to bonds, those assets are there in the yellow oval. You have, of course, gold, Bitcoin, commodities, various alternatives like absolute return hedge funds or managed futures or market neutral, T-bills are in there. You get a sense of what is in that diversifier bucket.

[00:27:06] Again, coming back to this notion of tails, we know what's in the middle, it's mostly equities and some bonds but what's in the tails? As you can see from that bottom left corner there's nothing that is not a stock or a bond that is negatively correlated to either stocks or bonds. The only thing there is is the DXY which is the dollar index and that's certainly useful for Canadian investors to keep in mind. Other than that the best we can hope for is just to have asset classes that are not correlated, not positively nor negatively. Clearly, gold and Bitcoin are ... anyone who knows me those have been my choice. Gold is in a correction, which is fine. It kind of got a little bit ahead of itself at $4,400. We're now at 4,000, might go a little bit lower but gold does well when bonds do not. To me that's a good hedge.

[00:28:06] That's kind of how I think about a broadly based portfolio that can, hopefully, withstand some of the tails. From then it's a matter of rebalancing. If the stock market does completely blow off here and that 60% turns into 80% then you need to rebalance back to 60 because you don't want to be left holding 80% if that boom ever turns into a bubble and then you get a drawdown on 80% instead of on 60. Rebalancing is certainly an important thing.

[00:28:38] Alex Gabrini: That's great asset allocation advice. Thank you, Jurrien. In the last couple of minutes I'd be remiss if I didn't mention bubble watch. You've been on bubble watch all year. You talked about how there's a lot of retail enthusiasm in the markets right now but yet you are seeing signs of insiders selling. How do you reconcile these opposing signals and maybe provide us with a bit of an update on your bubble watch.

[00:29:04] Jurrien Timmer: Let's go to slide seven, I'll be quick here. The bubble watch has been, okay, if the 2022 rate reset bear market was like '94 and then '23 and '24 have been more like '95 and '96 because in '95 he internet boom was born with the Netscape IPO, in late 2022 the AI boom was born with ChatGPT being launched. Where are we now? As you see in the chart, it kind of looks like we're in early 1999 which makes you wonder, of course. When you look at the valuation, you look at Cisco's valuation back in the '90s, which was the poster child of the internet boom, at the top the P/E went to 215. That's a high P/ for a big, big, big technology company. Nvidia on the other hand is at a trailing P/E of 59, a forward P/E of 35, not even close.

[00:30:03] When you look at other parallels, for instance, if you look at slide 8, which shows the Nifty Fifty from back in the '90s on the left, the P/E ratio on the 50 biggest companies went to 40.5 while the P/E on the other 450 companies fell to 19.8. The top 50 were trading at twice the valuation of the rest of the market. If you go to the right you see we have nothing like that yet. I'm not worried that we are in a bubble right now that is about to burst but you want to be open-minded. When you look at sentiment, and you mentioned sentiment, let's go to slide 11, you look at fund flows and surveys, Wall Street surveys, generally people are enthusiastic which, of course, they should be because the market's up about 100% in the last three years so why wouldn't you be enthusiastic? You see that, right, the Investors Intelligence bulls minus bear in the top, plus 45 so 45 percentage points more bulls than bears is what you would expect.

[00:31:16] You look at the bottom, that's the corporate insider selling buying indicator. The ratio of insiders like CEOs and CFOs, officers of companies selling their own shares versus buying them, generally speaking the line is well above one because executives get paid in stock, they sell it to monetize their shares so it's generally above above one. It's the times when it goes below one that are really interesting and they tend to happen at market bottom so that means that insiders are buying more shares than they're selling and they generally only do that for one reason. That is that their companies are undervalued. It's a very good contrarian indicator at bottoms and not so much as indicator of tops. Having said that, right now, the ratio of selling to buying is 25 which is the highest ever for this series. Again, I don't want to read too much into that but it suggests that maybe company insiders are like, you know what, these levels are getting up there, maybe I should cash in some of my stock options. Just something to keep in mind.

[00:32:31] Alex Gabrini: Appreciate that. Thanks, Jurrian. I think that's a good place to end it today. I want to thank you for your time and for helping us to navigate this narrow path between the two tails. Appreciate it, and have a great week, Jurrien.

[00:32:44] Jurrien Timmer: Thank you very much.

[00:32:45] Alex Gabrini: Thank you for joining me today on Fidelity Connects. Coming up this week on the webcast, tomorrow portfolio manager David Tulk will share the latest insights from the Global Asset Allocation team. He'll provide a positioning update on F fidelity managed portfolios and address how key macroeconomic themes may be shaping their outlook. Tomorrow's webcast will be presented in English and feature live French interpretation.

[00:33:08] On Wednesday Fidelity Director of ETF and Alternative Strategy, Étienne Joncas-Bouchard is back for his monthly ETF roundup. Étienne will join us at 10:30 a.m. Eastern for a French language webcast and then speak with host Pamela Ritchie at 11:30 a.m. in English.

[00:33:24] On Thursday you won't wanna miss our special financial literacy webcast. Rob Carrick, Canada's trusted personal finance columnist, alongside key voices from our charitable partners will dive into why investment literacy matters more than ever. Discover practical tools you can use to help clients and their school-age kids build smart money habits. Don't miss this chance to boost your expertise and empower your clients. Let's make investment literacy your competitive edge. Thursday's webcast will be presented in English and feature live French, Cantonese and Mandarin interpretation. Thanks for watching. I'm Alex Gabrini.