The U.S. bull market is in its seventh inning, according to Jurrien Timmer, Fidelity Investments’ director of global macro, who suggested this week that equity investors should expect fewer tailwinds in 2025 than in the previous two years.
“Earnings are growing at a healthy pace. They're on schedule to go up 10% in ‘24, another 10, 12% in ‘25,” especially the Magnificent Seven mega-cap tech stocks, for which earnings estimates continue to go vertical, Timmer said on a Fidelity market and economic outlook webcast.
He noted what he called healthy fundamental momentum.
“But it's a more mature cycle. By my estimate, we're kind of in the seventh inning of the cyclical bull market, and almost by definition, as cyclical bull markets get more mature, you get sort of more cross currents. It's not all tailwinds like we saw in ‘24, where two-thirds of the gains came from valuation, on top of a solid earnings growth,” Timmer added.
Timmer and other Fidelity leaders offered their outlooks for this year and beyond, and their views didn’t always match.
Timmer: 10% Corrections Better Than Collapse
The market is “going to have the occasional indigestion, and we’re seeing it right now, and it’s not the end of the world. It’s how the stock market goes," Timmer predicted. "And I'd rather have a bunch of 10% corrections on the way to sustain new highs than not having them and then all of a sudden the market's sort of in a bubble mode and then it collapses.”
Corrections are healthy, fundamentals are intact and earnings are growing, but the days of 1% bond yields are over, he added, noting that bonds, considered a risk-free asset, are positively correlated to stocks.
Citing the discounted cash flow model, Timmer said, “the numerator is earnings growth or cash flow growth, and the denominator is the cost of capital, and the numerator is far more powerful than the denominator. So earnings will win the day, but they may not get the tailwind from rising PEs (price-to-earnings valuation) that we got in both ‘23 and ‘24.”
Stocks vs. Bonds: The Long View
Longer term, stock returns may not significantly outpace bonds as they did for the past two decades, said Dirk Hofschire, Fidelity managing director of asset allocation research. His team expects stocks to have only a half a percent advantage over bonds over the next 20 years given starting yields.
“So the good news is fixed income has much higher return expectations than we've been accustomed to for the past couple of decades. The bad news is the higher those yields stay, the harder it is to continue to get valuation multiples to improve from here. And they might even face headwinds if we can't get those interest rates pointing back down,” Hofschire said.
“This doesn't mean disaster, having below-average returns, and I don't know if that's going to happen in 2025 … but I think when we think about the next three to five years, valuations do start to matter more. And having somewhat reduced expectations for stocks, especially U.S. stocks that have done so well, might be a reasonable place to start,” he added.
Hofschire also said that dominant U.S. large-cap stocks, notably mega-cap growth stocks, could get a run for their money this year. Longer term, Fidelity thinks that U.S. large-cap stocks should trade at a 20% to 40% premium to the rest of the world, he said.
“The problem as we see it today," said Hofschire, "is that you're trading now at around a 60% to 70% premium.”
In a recent report, Hofschire suggested that investors might face below-average asset returns this year “as so much good news is already baked into consensus expectations.”
Hofschire also wrote that the two-year drop in U.S. inflation might not continue in 2025 due to persistent inflation pressures and the potential for new ones. Longer-term market interest rates may not fall as expected despite Fed easing, he added.
The Bullish Case
Denise Chisholm, Fidelity director of quantitative market strategy, said she stands “on the more rare side of the ledger” when it comes to market expectations for 2025 and suggested room for strong upside.
“Which is to say that despite the fact that the market's up 20% back-to-back over the last two years, and stocks are expensive, I don't find either of those to be predictive of the next year's returns,” Chisholm said. Wide valuation spreads between cheap and expensive stocks and high uncertainty metrics present “a very intriguing setup for U.S. equities.”
Chisholm said she doesn't find market headwinds as they relate to interest rates and the Federal Reserve to be predictive unless they're at extremes.
Looking at economic data for the past few years, she said, “I either think you need to say we had a very hard soft landing or we had a very soft hard landing. But either way we landed. And with that, being open-minded about that landing, that opens up the aspect of having a very durable both economic and earnings growth cycle. So that's sort of my base case is we enter 2025.”
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