FidelityConnects: Jurrien Timmer – The global macro view - September 29, 2025

[00:04:23] Pamela Ritchie: Hello, and welcome to Fidelity Connects. I'm Pamela Ritchie. We continue to power through bull market conditions both on a secular and cyclical basis. A global wellspring of investment opportunities continues to broaden for investors and the technical story remains strong for now. How will the upcoming earnings season impact the cyclical story? Will tariffs start to bite in a more meaningful way? Or will policy changes stemming from the so-called one Big Beautiful Bill kick in just in time? With the capex cycle for AI in relentless mode our next guest says there is a lot to like about the current state of affairs for equity investors. Joining us now to take us through the charts that spell out a continuing bull thesis while exposing some of the cautionary elements in the marketplace is Fidelity Director of Global Macro, Jurrien Timmer, and globally available to us today from London. Nice to see you. How are your travels?

[00:05:18] Jurrien Timmer: Good afternoon, Pamela. Nice to see you.

[00:05:21] Pamela Ritchie: It is good afternoon to you. It's tea time, really, in England at this point. We're delighted to have you join us here. I wonder if we begin with the story that it just is a powerful bull market at this point. I mean, I guess there are places to go from there but take us to what looks like pretty strong underpinnings for what we're sitting in right now.

[00:05:43] Jurrien Timmer: We can start with slide 1. It's always good to kind of take a step back because there's always so many things to worry about. This is, of course, why we're having the show every week now for over five years is to say, okay, what does the market say? What do the facts say? What does history tell us? The starting point for the conversation is we are in a cyclical bull market within a secular bull market. That, historically, has been the sweet spot in terms of sort of harvesting outsized returns from the markets. You've got an upcycle within a long term upcycle. You can see here, this is the MSCI All Country World Index making new highs almost every day or every week. Got about 75% of the stocks around the world, not just in the U.S., in uptrends. We see that red line, the global money supply is advancing. The global economy is pretty good. It's interesting just anecdotally, I've had to make some flight changes and kind of booking flights here and there in the coming weeks and many flights are just sold out. The ones that are not, the airfares are just astronomical right now. It tells me that things are okay. People are on the move.

[00:07:11] So we have a market cycle that is now just about three years old. October 12th, 13th, 2022 was the start of this bull market. Even three years later we are seeing earnings estimates accelerating higher after that tariff tantrum back in April. We have a good fundamental underpinning. We have a monetary policy regime that is now getting more accommodative, certainly around the world but now also with the U.S. with the Fed lowering rates a few weeks ago. The big conundrum, of course, is if we go to slide 2, is what should we be paying for those accelerating earnings? If you look at the upper part of the chart, this is a monthly chart going back to 1967, you see that uptrend line, you have to have a good reason not to be long that uptrend. There has to be a compelling reason to not just play the odds and say, okay, nothing compounds like equities s that should be the anchor in a portfolio.

[00:08:27] You look at the valuation, 25 times earnings, 3.2 times sales, those are expensive levels. The difference between price and value is price is what you pay, value is what you get, and what is the correct valuation for the markets. If we look at that purple line in the top panel profit margins are at an all-time high and that counts for a lot. That's a bird in the hand for investors which is why the price-to-sales ratio is so much higher than the price-to-earnings ratio because that's the differences in the margin. That remains sort of the conundrum, at least for the very top-heavy U.S. market with the Mag Seven now comprising 35% of the S&P 500 and sporting a 35 multiple in terms of their P/e ratio. The rest of the U. S. market kind of gets left behind. Which is why it's so good, and not to jump the gun on the conversation, but which is why it's so good that global markets have now joined the party, if you will, and for very good reason because the fundamentals globally are becoming more and more compelling.

[00:09:48] Pamela Ritchie: That piece of it, I mean, the melt-up as well is so different to a year ago, for instance, if you thought, okay, well, best to ... if you're looking at 35% of the U.S. market is seven stocks, or maybe it's a little more than seven stocks these days, but where would you diversify? You wouldn't immediately think, oh, well we'll just go global. It's quite a different year for having that as an option, I guess you'd say, to diversify into.

[00:10:18] Jurrien Timmer: As I think most of the listeners know whether and when and how and how much to spread out globally has been a conversation that all of us have had  forever. I mean, it's always a part of the conversation. For many years, really, the last 10 years it was really just academic because no matter how cheap other markets are if they don't compete on fundamentals, meaning earnings growth and how much of those earnings are paid out back to shareholders, it's a moot point because the U.S. was just exceptional. In many ways it still is. If we look at slide 6 the rest of the world, especially in my view, developed markets have really become more competitive. This is the MSCI EAFE Index, so non-U.S. developed stocks. They're trading at a 16 P/E, certainly a lot lower than the 24, 25 that the U.S. is trading at. If you look at the bottom panel you have what we call the PO, the payout. We know what earnings growth is but how much of those earnings are returned, if you will, to shareholders via dividends and buybacks is what constitutes the payout.

[00:11:47] What's interesting is that the payout in EAFE has grown faster over the last five years than the payout in the U.S., and the payout ratio, the percentage of earnings returned to shareholders, is 75% fir both regions. You can really say that at least EAFE, EM a little bit less, but that non-U.S. developed stocks are truly competitive with the U.S., and that includes the Mag Seven, but at a fraction of the valuation. We have conversations, we had one last week with one of our international PMs in Boston, he was saying he goes to Japan now, to Europe and companies are becoming much more savvy in unlocking shareholder value. Regional banks that would never have considered doing a buyback are doing buybacks. That's what is raising this payout and that's getting the attention of investors.

[00:12:50] For me, or for all of us, but in my view this is really good news because if this was just the USA show how do you diversify against a very top-heavy market with a lot of concentration risk? You can buy the Russell 2000 or you could try to buy an equal-weighted S&P but it's kind of binary because if you're not in those Mag Seven and they keep running, you're left behind. Now we have non-U.S. markets that are compelling and competitive so, to me, that becomes almost like a barbell. If you're globally invested you've got your U.S., you've got your Mag Seven, but you also have Europe, Japan, maybe some emerging markets. That's nice because we want to have as big a pond to fish from as possible so that we're not just left arguing over what seven stocks are going to do. That's not a good position to be in. I think this is overall very good news.

[00:13:52] Pamela Ritchie: It's fascinating. Can you just explain the catch-up that you said over the last five years that EAFE in terms of their payout has been accelerating even more than the U.S. acceleration. Does that have to do with rules around buyouts? At one point Europe was not so keen — buybacks, I mean, sorry, buybacks. Why has that accelerated so quickly in the last five  years?

[00:14:16] Jurrien Timmer: Well, there's a couple of reasons. Earnings growth has improved as well. It starts with earnings growth and then it's the share of those earnings that gets paid back, if you will. Earnings growth has caught up. The dollar is weaker, that has a little bit to do with some of this as well. Especially in Europe, the area has sort of has woken up from years of sort of just relying on the U.S. to do everything. There's that whole kind of sense with NATO and Ukraine that has just woken things up, if you will. To me, the big one is just companies are ... it's been so lacklustre there for so long that companies have just gotten smarter about, okay, these are idle assets, let's do something with this to be more disciplined with the capital.

[00:15:20] If you think about the European banks, they're extremely well capitalized it's just that they're just not growing. It's just doing more with your balance sheet and being more clever about it and unlocking some of that dormant shareholder value. The same thing is true in Japan. It's mostly that and I think it's very good to be playing in that field. It's interesting, in the U.S. that 75% payout ratio is two-thirds buybacks, one-third dividends. In EAFE it's the other way around. It's one-third buybacks, two-thirds dividends. That one-third buyback is relatively new because buybacks are not really in the culture there. That's something new and it allows them to compete on a more level playing field, I think.

[00:16:10] Pamela Ritchie: It's so fascinating how all of this works. We are heading towards an earnings season and I guess the question around that, is there anything that we think, expect or whatever to upend what's going on right now? The earnings expectations are high. They've come back from the April lows and the concerns around that but what could, in theory, be upended through an earnings season?

[00:16:38] Jurrien Timmer: If we go to slide 4, we've kind of come full circle in a way. We started the year with analysts expecting 12 1/2% growth in 2025. Then, of course, the tariff tantrum happened and earnings estimates were marked down significantly, down to 7.2%. Then the tariff dog didn't bite, I guess. It's bitten some but not as much as we were expecting. Then we got the one Big Beautiful Bill, we have this whole AI boom, as a result the estimates have gotten marked up again, not to where they started but typically the numbers come down during the year so we wouldn't really expect them to go back to 12.4. That's a pretty good round trip. You can just see on that chart that it was like a blip. It shows the market is always in price discovery. But the market's not always right, it's just right in discounting everything that is known. On April 2nd what was known is different than what's known today, and tomorrow may be different again. That's kind of how this engine works.

[00:17:54] If we go to slide 3, this is just zooming in on the quarter. The thick black line is the current or the quarter that will be released in a couple of weeks, that's third quarter. The growth rate has been very, very steady at around 7%. You can see that's typically how it goes because the numbers come down months before the earnings season starts but then in the weeks before companies have generally guided whatever they're going to guide and you get into a quiet phase and then earnings season starts which will happen very soon. Then almost always there is a bounce. That bounce certainly happened the last few quarters, from lower levels but it did happen. If history is any guide that 7% that is currently being expected will probably be in double digits before the earnings season is over. Maybe it'll surprise to the downside in terms of the tariffs that we can't really quantify are being felt in margins but we're not really seeing that in many other places. It's possible bit it's not my base case.

[00:19:08] Then you have the other side of that which is just the fiscal bill, the expensing of R&D. I talk to my colleagues in Boston and the analysts are looking at pretty good earnings expectations just from our side. My guess is it'll be a good quarter and it'll elevate that quarter into low double-digits which is where the last two quarters were. That puts you back into maybe a 10+% growth rate for the year. That's good to see because the market's expensive so it needs to be backed up by earnings.

[00:19:43] Pamela Ritchie: It needs to grow into those. The earnings need to grow into that a little bit. Let's talk about actually the data that's due out this week. This goes more to sort of the central bank story and where we head with the expectations for the economy and cuts ahead and so on. There is a government shutdown looming and some pieces of the data actually may not come out. Do we pay attention to the shutdown this time? Is it different? This is a yearly event.

[00:20:11] Jurrien Timmer: I think we've had something like 20 of them since 1970 or some number like that. The market generally doesn't care. It's good to make the distinction between a government shutdown and a debt ceiling cliff. If we get to a debt ceiling you get all kinds of theatrics in Washington, but if you don't pass a debt ceiling the U.S. would go into a technical default. You can't pay interest on your debt so that's a pretty big deal even if it's only a technical default. With a shutdown that  doesn't happen. Interest payments on the debt are exempt from the shutdown as well as other critical things like air traffic controllers and things like that. It's the park rangers that get cut and other services. Not to make light of that but, generally speaking, when people get furloughed and then the government reopens they get paid in arrears and it's sort of all well and good.

[00:21:13] Pamela Ritchie: It evens out eventually.

[00:21:16] Jurrien Timmer: It is, typically, again, theatrics. It's politicians scoring political points and things like that. It just feels a little different this time because Democrats have — and I'm not a political strategist — the Democrats have really no reason to play nice because they have been left kind of on the sidelines after the sweeping election last November. No one even really talks about them anymore so this would be a way to make a stand where their voices actually would be felt or heard, I should say. For the Republicans, the more cynical theories I hear is that this is an opportunity to actually not furlough people but actually fire them in terms of if you're working for a government agency that the administration doesn't favour this could be actually an excuse to take that hatchet out. It sounds pretty draconian, and I don't know to what degree that it's true, but it kind of feels like the stakes are a little higher this time and that a shutdown seems much more likely now.

[00:22:27] I think the betting odds according to Bloomberg are about 80% that a shutdown will happen. For the markets the most immediate effect tends to be no release of economic data, as you point out. We wouldn't get the payroll report and other reports. Is that the end of the world? Not really. The Fed just cut, it probably wouldn't cut until later this year so it's not like a policy decision that was going to be made can't be made now. I think the markets generally are still looking past this but this feels like one that could kind of go down to the wire, if not beyond.

[00:23:12] Pamela Ritchie: It's good to get your thoughts on that because there's a lot of discussion about it right now. In terms of the discussion of sort of cautionary elements within the markets, where do you see those? This really comes down to valuation, is that the cautionary tale, otherwise all systems go?

[00:23:37] Jurrien Timmer: It's interesting, we've been talking about does this AI boom become a bubble? Is this going to end up in a melt-up of sorts? We've tracked the non-profitable growth stocks and IPOs and sentiment surveys and the market's definitely getting more enthusiastic, let's put it that way. Kind of the junkier stocks that did very well back in 2021 during the meme stock craze and then fell 70% and have been lying dormant for several years are now waking up. Everyone's wondering who's the next Palantir. That's sort of the game we're in. I'm sure there are companies out there promising to be that AI killer app even though it never will happen. People look at Nvidia and the other big stocks and it's like, well, who are the next crop of winners? Actually, I was interviewed by Bloomberg last week about that, about the Mag Seven and what's going to be the next Mag Seven. That's certainly becoming part of the conversation and we have tools for that. We can look — what's that?

[00:24:45] Pamela Ritchie: What did you tell them? What are the next Mag Seven?

[00:24:55] Jurrien Timmer: Actually, the story's on Bloomberg today, actually. It's something like Mag Seven is so yesterday, here's a new basket of AI stocks. I just have one little quote in there. The question was more about ... there was a sense from the reporter that these things like Mag Seven or FAANGS  are like indices that are created by people and then they create another index. I'm like, no, that's not how it works. It's just that they're big winners, someone is looking to put a label on them and the Mag Seven kind of stuck. There'll be another Mag Seven and it'll be something else but it's not like an index committee that creates these things. We have metrics for this. We have sentiment surveys. We have these baskets of stocks like the Goldman Sachs, non-profitable tech. We have a general sense of froth, put-call activity. By most measures this does not look like we're in the high froth stage but I will pull up slide nine here which is my analogue to the late '90s.

[00:26:03] It's interesting, price analogues have flaws because they work until they don't and obviously no period is going to repeat exactly. What I've done actually with this one is, you know, we've talked about the '90s and back when the Fed was raising rates in 2022 I constantly used the 1994 analogue because that was kind of a bear market that was created by Fed tightening. Back then it was Alan Greenspan. There was no recession. Greenspan landed the plane, that was a soft landing. Then in '95 he gave back some of the rate hikes and the market ripped higher and that was the start of the Internet boom. That's on the left where the vertical line is, that piece of the analogue. The market's been on that trend and then in 1998 we had long term capital. The market fell 22%, rebounded very quickly, there was no recession and then Greenspan eased three times. That created that melt-up in 2000, or 1999 to 2000. The analogue kind of breaks there because the tariff tantrum was only two plus years after the start of the bull market instead of four years. You can still see that the 21% decline in April, that very fast recovery.

[00:27:27] A rate cut by Powell a few weeks ago feels very 1998-ish. Then you overlay that with the AI enthusiasm. Then you had, obviously, the internet enthusiasm and even headlines like Nvidia is now vendor financing Open AI. Cisco did the same thing back then. It was vendor financing to create more customers for its products. That was a little bit of a sign of froth. My sense is, again, based on the analogue is that I don't think we're anywhere near top but you can kind of see the road map a little bit. If this market cycle does go to an extreme, and we don't know if it will, then you start wondering if that also is the final chapter of the secular trend. Again, I'm getting ahead of myself but that could be a story for next year or the year after that.

[00:28:31] Pamela Ritchie: One of the things in your recent report, you take us back to the story of fiscal dominance which is pretty much what you're pointing to with the Fed cuts and where we seem to be heading, just sort of living with more inflation. There were some comments from Stephen Miran in the most recent FOMC meeting, or in that discussion, about why his position ... he came from the Trump administration, he's now on the board for the Fed and is voting, and he was the dissenter, of course, he wanted a double cut. What did you think of his comments? He talked a little bit about R-star which you often talk about with us.

[00:29:11] Jurrien Timmer: It was very interesting. Let's go to slide 8. The Fed cut 25 basis points, it was widely expected. If you look carefully at those dots, and there's many dots on the chart, I apologize, but the first line of dots of the dot plot there's one little circle that's way below the cluster of the other ones, and that's Stephen Miran. I presume it's him. Ee came out with a speech at the New York Economics Club, I think it was, last week and it was very interesting. I applaud him for laying out the framework. Whether he actually thinks this is the right plan or he's talking his boss's book, if you will, the boss being Donald Trump, of course, but it's interesting to see the folks who are arguing for much lower rates, which is kind of what you need if you're going to run a very large set of deficits, you need some form of financial repression to help finance that, so this is, I think, his use case or his proposal for what the rationale would be for essentially lower rates, much lower rate than we currently see.

[00:30:33] Very cleverly he uses a metric that cannot be observed in real time. R-star is a theoretical construct. It used to be considered to be 2% under John Taylor who came up with the Taylor Rule. Then after the financial crisis the Fed said, okay, no, this is a moving target, it's lower than that and they came up with the R-star series that we now know. It's about 1.4% or so. You add R-star to inflation you get to sort of a neutral rate and you get into, you know, it's around 4% which is where the Fed is. By the traditional R-star metrics the Fed is pretty much neutral right now, which I think is where it should be. He's saying no, no, no, R-star is much, much lower because of a variety of reasons and therefore a neutral rate is closer to 2 or 2 1/2%. Whether you believe that or not, and I'm skeptical, it is good to at least put that out as a framework and which then can be debated. It's also very clever that he uses something that cannot be disputed. It can be argued but no one can say, no, no, there's no way R-star is there, it's here, 'because it's not a real rate. It's a theory. He gets points for doing that. I think this is where the ideological divide is going to be. What is neutral? Where should the Fed be relative to neutral is one argument but what is even neutral is the other one. I think it's very useful in that sense that we're unpacking this now.

[00:32:21] Pamela Ritchie: It's really interesting to sort of see, as you say, at least getting some clarity on the thoughts of where perhaps the administration and Stephen Miran would like things to go. We just have sort of a minute left or so, I wonder if you could just sort of tell investors what to do with potentially a melt-up. Not sure exactly what we're in here right now but how do you go to the diversification chart and make sure you're diversified?

[00:32:47] Jurrien Timmer: I think just stay diversified. I would not want to be, obviously, short. If you're a global investor I could see a reason to be long non-U.S. markets because they now have a catalyst to catch up. But at the same time if the U.S. gets into silly season and you do have a melt-up you don't want to miss that either because you can kind of over earn your beta in a short period of time, provided that you can get out at the top which is not easy to do. I would just say be long beta overall. We're in a cyclical bull market within a secular bull market, whether that beta comes from the U.S. or outside the U.S., that's something we can discuss but you want to be in that 60 and then the 40 is another matter. Closer to 4% for the 10-year yield is, I don't think is that compelling. Closer to 5, yes, but not closer to 4. I would just stay the course. It's just a matter of how quickly or how slowly you earn that beta over time. Maybe this one will come quicker and then we'll have another conversation about what to do next.

[00:34:06] Pamela Ritchie: It's wonderful to see you and thank you for making time for us in your travels around Europe. We wish you very well on those travels. We'll see you soon.

[00:34:14] Jurrien Timmer: Thank you.

[00:34:15] Pamela Ritchie: Jurrien Timmer joining us from London today on Fidelity Connects. Coming up tomorrow, portfolio manager Reetu Kumra. She joins us for an update on the Canada Longs/Short Alternative Fund including where she is finding opportunities across Canada and the marketplace here.

[00:34:29] On Wednesday, portfolio manager Max Lemieux. He'll be on the program. This is at 10:30 a.m. Eastern for a French language webcast. He'll be hosted there by Charles Denis. At 11:30 a.m. Eastern time we'll be speaking in English with him on this show. Max is going to be taking us through what is moving Canadian markets, vast opportunities, actually, as he sees them so you'll want to tune into that and hear about how the Fidelity True North Fund is positioned at this point.

[00:34:57] On Thursday join Director of Research and portfolio manager, Steve MacMillan, along with equity research associates, this is Connor McGrath and Christian Ghezzi, as they share research notes on small and mid-cap companies across the U.S. and what role some of these companies might play in diversifying investors' portfolios and where some of those investment opportunities actually lie. That should be a fascinating conversation with those three joining us here in studio. Thanks for joining us today. Have a good week ahead. I'm Pamela Ritchie.