FidelityConnects: Jurrien Timmer – The global macro view

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Hello, happy Monday, welcome to Fidelity Connects.

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I'm Pamela Ritchie.

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Enjoy the good weather while it is here.

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It may not erase the market's worries but it can

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be an excellent moment to invest in a bull's own

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moment. The tantrum in April was

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tough for sure but it has been a bountiful year, says our

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next guest, with an international trade policy that

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is proving to be less bad than expected for

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U.S. stocks. As well as the helpful tax and

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depreciation levers built into the One Big Beautiful Bill the

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U.S. exceptionalism story rolls out new highs pretty

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much weekly.

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A continued expansion in spend for AI

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development provides a powerful platform for the

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AI trade in the year to come as well.

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Joining us here today to discuss what this ultimately means

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for investors and advisors alike is Fidelity

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Director of Global Macro, Jurrien Timmer.

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Jurrien, warm welcome to you today.

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Thanks for joining us.

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Good morning and Happy Plaid Day.

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Exactly, we're back to the, that's right, it's plaids, it's

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everything to do with fall.

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Glad to have time with you.

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It has been remarkable weather, actually, genuinely

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outside. I think a lot of people on the East Coast have

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experienced an elongated autumn season.

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The markets themselves also, there are

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worries, but what do you say to those?

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The bull market, we're now in the fourth year

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of a bull market that began in October of 2022.

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It looks pretty good.

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I mean, there are definitely some drawbacks.

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The concentration risk, obviously, is a real thing and it's

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all good when the market goes up and if you're

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passively invested or actively in the Mag Seven.

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But at

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some point that concentration risk will go the other way so

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that is a double-edged sword.

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When you look under the hood of the market, even

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though it is a narrow market earnings

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are doing the heavy lifting.

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We've got 70% of the index now having

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reported earnings and the bounce has been significant.

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The growth rate going into earnings season was expected

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to be 7% for the third quarter, it's

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now up to about 14%.

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The dollar estimate has gone from 67

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to $71 per share.

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There are some very strong earnings momentum and that's

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allowing the valuation side to take a little bit of

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a backseat this year.

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As we all know, and we used to

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talk about it every week, in the early days of

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the cyclical bull market it was all valuation all the

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time. Earnings actually declined very slightly in

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2023 and then in 2024 earnings came

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in, grew 11% but valuations

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still amplified the returns.

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Now in 2025 valuations,

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they were up then they were down during the tariff tantrum,

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now they're up again but they really haven't moved anywhere.

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They're at high levels, don't get me wrong, and that is

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another headwind but they're not

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doing the heavy lifting at this point.

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It is the earnings side.

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The earnings growth rate for 2025

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which started the year at 12, dipped down to 7

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in April, is now back up to 11.

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The earnings story is good.

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It is top-heavy, there's no question, but 83%

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of companies have beaten earnings by an average of 5%

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so it isn't just seven stocks.

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It is the majority of companies in the

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S&P and around the world.

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The earnings story is a global one.

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I feel like we could do a historical sort of montage,

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actually, of you saying through 2023,

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through sort of early stages of 2024, valuation story,

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it's great, you always give us such balanced thought but you

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said quite frequently at some point earnings will

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have to take the baton. You were sort of mentioning that

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through the growth of valuations for all those years.

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It's done exactly what you told them to do,

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they were listening, ultimately.

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So I'm not always wrong.

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No, you're mostly correct in

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a lot of things that you've been talking about.

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Now, we are seeing, to sort of follow your

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analogy of harvesting, we are seeing some people taking

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some gains at these levels.

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I'm sort of curious what you think about that.

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It's always a tricky road

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to follow there but we do hear headlines about that, to what

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extent do you think that that's what's going on, should be

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going on?

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Behavioural economics says

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that there's a lopsided

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attitude towards gains and

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losses.

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It's called loss aversion.

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When the gains are good, as they have been,

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the S&P is up 99% since

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the bull market began, and since

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the secular bull market began in 2009

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market's up almost tenfold. Someone

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would be forgiven when they

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say I want to harvest these returns.

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Actually, as you'll see when ...

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for those of you watching when my WAR comes out later

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today it's about making hay while the sun

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shines.

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We've had a very robust period

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now of 16 years, accentuated by

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this latest cyclical bull market, of very,

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very strong returns.

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In a way, we're over-harvesting, we're over-earning

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because the rates of return are well

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above the historical norm, which is

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10, 11% per year.

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We're more like 15% for the last 10+ years.

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It is important to harvest those betas while we can

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and that means being in, but when people look at

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the markets and they look at evaluations of some of

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the AI stories and other companies that

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are trying to participate in that theme,

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even if they don't have any earnings

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people starting to see this market becoming more

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bubbly. They remember, of course, the internet

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bubble which was only 25 years ago only, well, only.

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People can be forgiven for saying, you know what, maybe I

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should take my chips off the table.

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My sense is between the earnings power,

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the AI story which is a very juicy,

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compelling narrative, the fact that bond

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yields are very well behaved right now at about 4.1%,

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the Fed is cutting rates, it's

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now what I would think of in sort of the high neutral

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territory, there's not a lot

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not to like fundamentally and technically

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other than that concentration risk

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and the fact that valuations, at least for the

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cap-weighted index, are in the upper

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percentiles of history.

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Now, the average stock is not at a high valuation,

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actually, I almost forgot we have charts here.

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If we go to slide 12 you can see that

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the average stock is growing earnings,

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is trading at an 18 multiple,

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is now three years and a month into

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a cyclical bull market.

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It looks all right.

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The same is true for global stocks.

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The global market also is in good shape.

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Again, that uptrend line that you see there with the yellow

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shading, we all want to

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participate in that because that is the harvesting

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while the sun shines.

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Again, the top heaviness which has

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been a benefit, right, it has driven the S&P to

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levels that we otherwise simply would not have seen.

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We do have to watch out that at some point we could

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be facing the other side of that knife.

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The secular markets, which you have written about, they're

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special because they don't happen that often.

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They have sort of beginning and end points.

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You said before we may be in the later innings.

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That said, the earnings picture that we've just gotten out on

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the AI, to what you're speaking to, looks like

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the spending is nowhere near finished.

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That will be dumped into the economy.

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There's lots of reason to think that this will continue.

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I don't know, what do you think about that?

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Yeah, and actually, let's just pull up slide seven.

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I should have done that earlier showing the earnings.

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There's, obviously, a relentless gold

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rush, if you will, for the CapEx

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spend to make AI the scalable

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thing that supposedly it's going

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to be.

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You look at the numbers, the Amazons,

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Meta, all these companies are spending 50, 75

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billion, 100 billion, it's

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like they can't get enough because they all need to win.

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It's a race not only in the U.S.

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but around the world. By the way, this is just showing that

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very substantial bump in the earnings numbers during

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the current quarter.

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You worry, of course, about overinvestment.

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This is trillions of

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dollars being spent,

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just maintaining this infrastructure when it's

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all done could cost a trillion dollars a year.

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That's interesting. I haven't heard that before.

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We don't really know what the

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killer app is going to be. We all can go

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on ChatGPT or we can Google and

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that's all becoming smarter but

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is that enough?

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Is that going to generate enough revenue to support

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a trillion dollars of maintenance?

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The believers will say this is not just about a

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search engine, this is about the pipes of

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the economy, the technology based

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economies around the world and this is why it's

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a race, South Korea, China, Japan, the U.S.,

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and you can't spend enough.

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These things

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can sometimes end with overinvestment, especially

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when the narrative is hard to quantify.

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We don't know.

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OpenAI buys all this stuff from Nvidia

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and Nvidia is providing the funding but

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nobody knows where the

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revenue ultimately is going to come from.

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It's a little bit of a leap of faith but it's

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certainly an interesting story to watch unfold.

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We're always looking for excesses of course but so

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far that train is moving pretty fast.

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It's moving pretty fast and, as you say, the concentration

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story is well telegraphed.

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For the other 493

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companies that are in the S&P 500, this

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is a bit crudely described, but to what extent can

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they be in buckets of AI versus non-AI,

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some sort of exposure. They're smaller companies but they're

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going to produce some version of a component that feeds into

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AI and therefore have a bit of a blast-off on their earnings.

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Do you divide them that way?

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Is there a way to look at them that way?

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Well, let's pull up 16 which doesn't answer your

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question but it's interesting, I forget who it was but

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one of the Wall Street houses estimates

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that almost half of the S&P

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is in some way or another an AI trade.

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The Mag Seven is 36%, the top

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10 stocks are 41%.

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It is sort of an all AI all the time.

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The thinking is that you're either involved

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with building the infrastructure, the pipes, whether

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it's a utility or a nuclear company or data

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centres, chips, all of that stuff,

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or you're going to provide the software

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which again, we don't know beyond sort of ChatGPT what

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the killer app will be, or you

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just benefit from the productivity gains

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that come from the AI boom.

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You may not have anything to do with AI but if you're

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a company that employs a lot of people that

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can be made a lot smarter through an AI

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agent, or they're replaced by an AI Agent,

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then those companies would benefit.

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That's part of the bigger narrative around the

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fiscal impulse that we've talked about so many times.

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Can we grow out of the debt here in the U.S.,

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and if we do it will have to come from

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productivity because the labour force is not going to

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grow that much.

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It is part of the bigger narrative.

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Just bringing it back to the secular trend

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here in this chart, you can see only 67%

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of stocks are in uptrends right now, it's not

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a very robust number.

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If you look at the pink kind of slope, that is the

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long term trend line and the yellow one is

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the current secular bull market.

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You can see how advanced those slopes are.

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It's a very powerful thing.

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You don't want to be short this market because it is a train

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that's moving fast but you are above the

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trend line.

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The secular trend is now, in

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my opinion, 16 years old and the typical one lasts about

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18 or so, so you do

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start to worry about what comes

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after this very robust period of

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plentiful harvest and will we have a period

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down the road where the beta becomes

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less robust, and then we have to get

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more alpha. The market doesn't go up 20%

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every year all the time because the rate

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of change is more like 10.

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That's something I think about.

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For a typical investor

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who has, let's say,

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passive exposure we want to make

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sure they understand that the passive exposure

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is benefiting right now from this concentration

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but that that can go the other way at some point as

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well. Hopefully, not soon.

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You want managers who are able to pull levers to change

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that up [crosstalk].

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Yeah, or have a global diversification.

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Actually, I'll show you this chart 20 which I

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find interesting, not just because it's my chart but

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because it tells a story.

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If you look at non-U.S.

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equities, the MSCI EAFE

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which is non-U.S. developed, that's

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a very nice uptrend, very broad participation, 70, 75%

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of the stocks are going up, the earnings are good, the

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payouts are good, the valuations are cheap.

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But if you look at that pink line and the blue line,

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that's the relative performance against the S&P.

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The blue line is against the S&P cap-weighted which is how

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everyone would measure it.

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The pink line is against the equal weight and it shows you

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that the global stocks are

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outperforming the average stock in the

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U.S.

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That's important because if the concentration

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risk ever turns into a liability

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that means that non-U.S.

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equities, even if they don't go up a lot in terms of the

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beta I think they are very likely to outperform

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very much so from an alpha perspective.

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I think for me the barbell strategy

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of, okay, cap-weighted S&P,

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non-U.S. developed equities is a very

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nice barbell strategy for navigating

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concentration risk in the U.S.

[00:16:34.200]

That is fascinating.

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<b>Hello, investors. We'll be back to the show in just a moment.</b>

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<b>else you get your podcasts. Now back to today's show.</b>

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Just going back to the bull market and how

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long it is and how long they typically are,

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historically do they have as much technological change

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within one period of a bull market as we're experiencing

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right now? I mean, everyone wants to say it's different this

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time but it does seem that we came out of financial crisis,

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eventually got out of that and took off properly,

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started the bull market and then have had consequential

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change over the course of the last two or three years to

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change what is powering the bull market.

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Is that typical?

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I think so. If we go to slide 18 ...

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the caveat with looking

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at secular trends is that there've only been a couple because

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they last 20 years.

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There are just not that many of them.

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The big ones were the roaring 1920s.

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I don't know that that was, I guess it was technology of

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a kind. It was radio and other industrial

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developments. Then we had the '50s and '60s.

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The '60s was the space age so we had

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to glamour stocks and the '68 secular top

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was a little bit of a speculative bubble

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in the electronic stocks.

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So, yes, technology or some kind of

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game changing industrial or

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technological development is definitely part

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of these big booms because they raise productivity,

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they raise earnings and then they become very compelling

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and people get involved.

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Then the '60s ended with a whimper.

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It was the late '60s, there was

[00:18:49.920]

a little bit of a retail speculative bubble that

[00:18:53.280]

popped, we had the recession in 1970 and then

[00:18:56.400]

the market came back. Then we had

[00:18:59.960]

the Nifty Fifty period and then just inflation just ate away

[00:19:01.960]

at valuations.

[00:19:03.920]

In the '90 it was more of an outright

[00:19:07.040]

bubble where the top 50 companies

[00:19:10.120]

in the S&P, their P/E doubled from

[00:19:13.520]

20 to 40 while the rest of the market stayed

[00:19:16.720]

at 20. That was a very visible

[00:19:20.000]

kind of period of over enthusiasm,

[00:19:23.760]

let's put it that way.

[00:19:25.920]

Actually, if we can go to slide 15 for a second,

[00:19:29.440]

both of those periods did have something in common.

[00:19:33.760]

They ended, of course, but if you look at the

[00:19:37.160]

concentration in the bottom there, the percentage

[00:19:40.280]

of stocks outperforming.

[00:19:42.600]

In January '73 which was the

[00:19:45.840]

top of a bull market going

[00:19:49.000]

into the '74 bear market of 48%,

[00:19:52.760]

only 26% outperformed at that top.

[00:19:55.880]

Then in June of 2000 which was the top of

[00:19:58.960]

the internet bubble, only 27% outperformed.

[00:20:02.840]

Today only 28% is outperforming.

[00:20:06.720]

Again, I don't want people to get panicky that I think that

[00:20:10.080]

this is therefore the top but

[00:20:13.360]

those are three periods of

[00:20:16.560]

substantial concentration risk

[00:20:19.640]

and they happen at periods of time

[00:20:22.960]

when it led to a leaner period, let's

[00:20:26.320]

put it that way.

[00:20:27.480]

From that discussion I wonder if we can just go a bit

[00:20:30.960]

macro because we have you with us and we'd like to do

[00:20:34.000]

that. There is a question coming in on the ongoing U.S.

[00:20:37.200]

debt, ultimately, could it affect markets?

[00:20:40.240]

I might just add into that, the

[00:20:43.320]

hearing or the announcement on IEPA and how that

[00:20:46.440]

court decision goes one way or the other, the tariffs have

[00:20:49.720]

gone a long way to funding the debt issues, deficit

[00:20:53.000]

issues in the U.S. recently.

[00:20:56.080]

I guess, yes, that in the background and then a decision of

[00:20:58.960]

IEPA on top of it, could you comment on market effects one

[00:21:01.960]

way or the other if you think there will be any.

[00:21:05.240]

We're waiting, obviously, on the Supreme Court.

[00:21:08.640]

I don't think it's necessarily a market moving

[00:21:12.280]

thing. I think that the China trade

[00:21:15.440]

truce is much more significant.

[00:21:18.320]

It just shows you that the U.S., even though

[00:21:21.560]

the Trump administration thinks it's holding all the cards,

[00:21:24.840]

it's not. The AI boom requires rare

[00:21:28.040]

earths and China has them.

[00:21:32.360]

They try to bully China and China

[00:21:35.440]

says not so fast.

[00:21:37.280]

Now we have a detente

[00:21:40.840]

and that, of course, is bullish for the markets

[00:21:44.040]

because it dials back down the

[00:21:47.320]

tariff rhetoric a little bit more.

[00:21:49.520]

In terms of the Supreme Court, if they overrule

[00:21:53.400]

this the administration will just

[00:21:56.720]

find some other obscure piece of law,

[00:22:00.360]

emergency law, and do it then.

[00:22:02.440]

I think what's more important is just this

[00:22:05.560]

thing is now six months old, April

[00:22:09.120]

2nd was seven months ago,

[00:22:14.400]

it just hasn't been as big or as bad

[00:22:17.760]

as the markets expected.

[00:22:20.680]

I'm speaking on behalf of the U.S.

[00:22:23.320]

markets. I know in Canada you guys are really in

[00:22:26.480]

at ground zero there.

[00:22:30.280]

The fears of a tariff war or a trade

[00:22:33.320]

war have been replaced by enthusiasm

[00:22:36.480]

from the One Big Beautiful Bill and the kind of CapEx

[00:22:39.560]

that that has unleashed, the AI trade, and

[00:22:42.920]

then we have a Fed that's easing policy, we have

[00:22:45.960]

a bond market that's very, very quiet.

[00:22:48.440]

The question was about the debt

[00:22:51.880]

so let me pull up slide 5 here.

[00:22:56.480]

The bond yield is at 4.1%.

[00:22:59.480]

The debt has not gone away, it's still happening.

[00:23:03.280]

At 5%, 4 1/2,

[00:23:06.680]

5% the bond market really starts to cause consternation

[00:23:11.080]

in the stock market. At 4% it's very

[00:23:14.280]

benign. I don't know why

[00:23:17.400]

the bond vigilantes are so calm.

[00:23:19.840]

I think the bond market is trading more off

[00:23:23.000]

of the Fed and what it's doing and what its impact is

[00:23:26.400]

on the forward curve.

[00:23:28.360]

Let's say the Fed cuts a few more times,

[00:23:31.520]

the 2-year yield would be probably at 3% if

[00:23:34.720]

that were to happen, then a 4% 10-yield kind of

[00:23:38.040]

makes sense given the normal shape of the curve.

[00:23:41.400]

My guess is also the bond market knows that Scott Bessent

[00:23:44.480]

is a very smart, savvy Wall Street guy

[00:23:47.680]

who will figure out a way to issue

[00:23:50.720]

debt without unravelling the bond market.

[00:23:53.640]

I showed this chart because

[00:23:57.360]

the TGA account, which is

[00:24:00.760]

the Treasury's cash balance at the Fed, it

[00:24:03.920]

tends to go up and down depending on whether there's a

[00:24:07.160]

debt ceiling cliff going on or not.

[00:24:11.120]

Generally, when there's a debt ceiling cliff,

[00:24:14.320]

which there isn't right now, there's a shutdown but not

[00:24:17.200]

related to the debt, the Treasury will run

[00:24:20.320]

down its cash balance and then replenish

[00:24:23.520]

it when the debt can be issued.

[00:24:25.280]

Right now Scott Bessent has replenished

[00:24:28.840]

the TGA to $1 trillion.

[00:24:30.960]

I don't know why it's doing that because there is

[00:24:34.080]

no fiscal cliff but maybe

[00:24:37.520]

he is creating some powder, some dry powder

[00:24:40.840]

that if the bond market starts to have a reaction

[00:24:44.240]

to the supply of Treasuries

[00:24:47.600]

that he can just spend that trillion instead of issuing debt.

[00:24:51.760]

Maybe has some sort of master puppeteer

[00:24:54.880]

kind of plan that the bond market is

[00:24:58.080]

agreeing to. We'll see how it happens but it's

[00:25:01.480]

been very quiet on the interest rate side.

[00:25:04.160]

He'll have an interesting memoir to write already, Scott

[00:25:05.800]

Bessent. He clearly was all over that

[00:25:09.040]

China trade deal, was he not?

[00:25:12.520]

Yes. He is the adult in the room, he's a market person

[00:25:16.880]

and he's the one that kind of walked the more

[00:25:20.760]

protectionist elements in the White House back from

[00:25:23.840]

the edge back in April.

[00:25:25.920]

He clearly has the President's ear, which is a good thing.

[00:25:28.520]

He's highly

[00:25:31.600]

respected because he's not a crazy.

[00:25:35.600]

It's very interesting. How long will this shut down last?

[00:25:38.800]

For some reasons the markets have been calm about

[00:25:42.280]

it. It's more of a Washington story, I guess,

[00:25:45.320]

ultimately, but it's obviously affecting people's lives.

[00:25:48.360]

I'm just curious your thoughts on how long this may go on.

[00:25:52.440]

It's now a month old. My

[00:25:55.920]

fear is that it will

[00:25:59.000]

go on until something bad

[00:26:02.200]

happens like with an airplane

[00:26:05.520]

because TSA agents and

[00:26:08.720]

air traffic controllers are only going to work for so long

[00:26:11.800]

with no pay before they start calling in

[00:26:14.880]

sick. I don't know that for a fact but you're starting to

[00:26:18.200]

hear some stories. As a very frequent

[00:26:21.320]

flyer so far I haven't had

[00:26:24.600]

any impact but I hope

[00:26:27.680]

it doesn't become something like that where there's

[00:26:30.920]

an incident at an airport and then finally they

[00:26:35.080]

start to work. My guess is that there are other things that

[00:26:38.200]

are more boring and legislative that will start

[00:26:41.320]

to kind of hit deadlines that need to be resolved with

[00:26:44.440]

a continuing resolution and that maybe around Thanksgiving

[00:26:47.680]

or so finally something will be done.

[00:26:51.280]

So far, the market tends to look through these things and

[00:26:54.000]

that's exactly what they're doing right now.

[00:26:57.080]

Just a final thought on the markets.

[00:26:58.680]

This is what the questions that are coming in are on.

[00:27:01.800]

You've mentioned it a lot here, lots of questions about a

[00:27:04.320]

bubble and so on, but maybe just to refrain

[00:27:07.400]

how you started off with an interesting moment to

[00:27:11.320]

make hay while the sun shines. Just your final

[00:27:14.520]

thought for investors this week.

[00:27:16.880]

Just pull up slide 19 real quick.

[00:27:19.840]

We are on bubble watched, of course.

[00:27:21.400]

That's the question I get from everyone.

[00:27:25.280]

My sense is that if this is all we're talking about then

[00:27:28.160]

probably it's still early and maybe it's not a bubble at

[00:27:31.240]

all. Maybe the AI boom will

[00:27:34.520]

turn out differently from the internet boom.

[00:27:38.320]

The way I look at it, I look at the analog of now

[00:27:41.760]

versus the late '90s, they're

[00:27:45.720]

a spitting image. You look at that top overlay,

[00:27:48.800]

we had long term capital, we had a 22% decline,

[00:27:52.040]

a very high momentum recovery.

[00:27:53.680]

Greenspan sprinkled three rate cuts on

[00:27:56.920]

top of that, that sounds pretty close to what we've

[00:28:00.200]

had over the last six months or so.

[00:28:02.160]

We look at this, analogs work until they

[00:28:05.320]

don't so maybe this one doesn't work.

[00:28:08.960]

We are not anywhere close to the kind of valuations

[00:28:13.000]

that we would need to for, I think,

[00:28:16.360]

many of us at Fidelity to say, holy cow.

[00:28:20.440]

The earnings are doing the heavy lifting.

[00:28:22.240]

The Mag Seven are up fourfold since

[00:28:25.320]

2022, their earnings are up threefold

[00:28:28.520]

so it is mostly an earnings based.

[00:28:31.160]

If there's a risk I think it's one where they

[00:28:34.360]

just end up overinvesting without a

[00:28:37.640]

clear payoff, that the AI

[00:28:40.800]

boom rewards everyone through more time, more

[00:28:44.000]

productivity but that the ROI

[00:28:47.440]

on the infrastructure doesn't materialize.

[00:28:50.800]

I'm not the expert on that and we have some time

[00:28:54.000]

before that, I think, would even pan out.

[00:28:56.640]

Before you say holy cow.

[00:28:58.040]

We're grateful for the discussion of hay.

[00:28:59.840]

The cows are grateful for the hay.

[00:29:01.720]

We're grateful for you who joins us rain or shine.

[00:29:03.680]

Jurrien Timmer, thank you for setting us up this week very

[00:29:06.400]

much. All the very best to you.

[00:29:08.240]

Great, thank you.

[00:29:10.680]

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