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New Bull Market Might Be Underway: Fidelity

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What You Need to Know

  • Earnings resilience and estimates are bullish signs, Jurrien Timmer, a top Fidelity researcher suggests.
  • He added that the economy has held up well.
  • Small-cap stocks have languished, however, and S&P gains are narrow, he said.

U.S. equity investors might be experiencing the early stages of a new bull market, despite notable signs to the contrary, according to a midyear outlook from Fidelity.

While stocks overall are up this year, Jurrien Timmer, Fidelity Management & Research Co.’s global macro director, noted that just a few mega-cap stocks have fueled those gains.

“That looks inconsistent with the idea that we’re in a new bull market, since early bulls tend to be characterized by broad-based gains and rising small caps, which we haven’t seen. That said, earnings have continued to prove surprisingly resilient,” he wrote in a new post on Fidelity’s website.

“With each decent earnings season we see, it becomes less likely that the market takes another leg down and more likely that we’re already in the start of a bull market,” Timmer added.

He outlined several indications that a bull market may have started while also examining more bearish signals.

The stock market has been in limbo for a year, “and it makes me wonder whether the strength in the S&P 500 in recent weeks could indicate that the next, or current, bull market is finally declaring itself,” Timmer wrote.

If the recent strength had been broad based, he said, “it would be easy to call this a new bull market. But the opposite has been true. Because the S&P is weighted by market capitalization, the largest companies have an outsized influence on its movements.”

While a few mega-caps have driven gains, he wrote, “the rest of the market has languished.” Small- and micro-cap stocks have lagged this year, which doesn’t suggest a bull market, Timmer wrote.

“Early-cycle bull markets tend to be driven by segments and styles that are more economically sensitive and more volatile,” with small- and micro-cap indexes usually in or near the leader, he said. “So their weakness this year hasn’t looked consistent with a new bull market.”

Timmer said he wondered whether a new bull market that doesn’t look like previous new bull markets might be quietly underway, or whether a big market-clearing rout is right around the corner.

Market bears and bulls both have cases, he noted.

“The bearish outlook is that the much-anticipated recession is going to finally arrive, and that we are on the brink of an earnings washout that will trigger another down leg — in what will prove to be a prolonged bear market,” Timmer said.

The bullish outlook holds that interest rates have peaked, the Federal Reserve is done raising them, the economy is holding up and earnings will rebound later this year, he said.

Earnings Resilience

Earnings have proven “surprisingly resilient” so far this year, and “estimates seem to weigh in favor of the bulls, with consensus estimates expecting that earnings growth is bottoming now, and will return to a 10% growth rate in 2024,” Timmer said.

Corporate revenues have reached all-time highs, at least in non-inflation-adjusted terms, during this market cycle, he added.

“Historically, stocks prices tend to recover about two to three quarters before earnings do,” Timmer said. “If the bullish view is right, it would make sense for the bull market to start declaring itself now.”

Is the Fed Done?

The market had expected that the Fed was done raising interest rates and would start cutting them but now is pricing in a higher chance that the central bank isn’t quite done, considering new inflation data last week, Timmer said.

“My guess is that the Fed may indeed be close to done, or done, raising rates for the cycle, but that it will be a while before it cuts rates, unless the economy falls off a cliff and takes inflation with it. So far, that has not happened,” he said.

The Fed’s rate decision will depend on inflation and employment, Timmer noted.

“Inflation has generally been heading in the right direction — notwithstanding the most recent report — although it’s clearly not yet back at the Fed’s targeted level. And the employment picture continues to hang in there, with unemployment merely 3.4% as of the most-recent reading,” he added.

Timmer also noted that when Washington lawmakers eventually raise the debt ceiling, “it will likely be welcome news for the market.”

Indeed, stock indexes rose Friday after the Senate late Thursday passed a bipartisan compromise to raise the debt ceiling and avoid a default on government debt.

Looking for Bullish Signals

For a near- to intermediate-term market outlook, Timmer said he’s watching for bullish signals in price-to-earnings ratios.

“Stock prices typically recover before earnings do. This means that the early phases of bull markets have historically been driven by rising P/Es — because prices are rising even as earnings are still falling,” he wrote.

A “classic bullish playbook” would be to see the rate of change in forward P/Es become positive even as earnings growth continues to weaken, but not by too much, Timmer added.

Timmer noted that “the overall resilience in earnings has been surprising, given that the Fed has raised rates by 5 percentage points in little more than a year.” The economy might have become less sensitive to rate increases, he suggested, noting that homeowners and companies “had ample opportunity to refinance their debt during the ultra-low-interest-rate days of 2020 and 2021.”

Earnings might take a big hit, he said, “but with every decent earnings season that comes and goes, time seems to be running out for the doomsday scenario. Now, if only small caps would play along.”

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