Navigating the fourth quarter and beyond
Jurrien Timmer’s global macro view – October 21, 2024.
As we dive into the heart of earnings season, the global equity markets are taking a momentary pause after a period of record highs. Jurrien Timmer, Fidelity's Director of Global Macro shares his insights on earnings, interests and liquidity and their potential impact on market dynamics.
Record-high earnings and market implications
The recent market activity has presented a compelling narrative: company earnings are growing robustly across multiple sectors. According to Jurrien, about 76 companies have reported their earnings, with 72% surpassing estimates by approximately 6%. This broadening market trend is driven by positive earnings reports, contributing to a healthier and more diversified economic climate.
This period has also seen a notable broadening in markets, attributed to events like the rate cut by the U.S. Federal Reserve (the Fed) in September, which fostered a more positive market outlook. While earnings continue to grow, the rate of acceleration seems to be slowing down, indicating a maturation of the current earnings cycle.
The unusual tandem of earnings and valuation growth
A striking aspect Jurrien highlights is the concurrent rise in both earnings and valuations – a rare occurrence historically. Typically, the price-to-earnings (PE) ratio moves inversely to earnings, but the current market defies this norm, exhibiting a synchronized rise. This dual lift is seen in only a few historical instances, such as the mid-2010s and the Greenspan soft landing in 1995. This unusual scenario suggests a heightened return profile for the market, with profound implications for both developed and emerging markets.
Emerging markets and the China factor
Turning the focus to emerging markets, particularly China: there is significant interest in the ongoing stimulus initiatives. The Chinese government’s efforts to stimulate the economy by easing conditions for share repurchases and providing loans have sparked market interest. While the MSCI China Index has seen fluctuations, the potential for further rallies remains, contingent on tangible follow-up actions by the government to foster consumer confidence and spending.
Liquidity and rate decisions: A global outlook
The liquidity landscape and rate decisions continue to be pivotal topics. In the U.S., the Fed’s rate cuts, which are part of a normalization policy rather than an easing cycle, reflect an improved inflation scenario and a balanced labour market. This soft-landing narrative is reinforced by stable jobless claims and a resolved labour demand imbalance.
Interestingly, despite significant balance sheet reduction by the Fed, technical components such as reverse repos have neutralized the impact, suggesting that market liquidity remains resilient. This resilience hints at a potential liquidity wave in the upcoming year, driven by fiscal dynamics and selective easing measures, which might bolster equities, gold and other assets.
Canadian interest rates outlooks
Canada presents a different picture, particularly with inflation falling below expectations. This dynamic raises the question of how the Bank of Canada will navigate its monetary policy amidst a relatively stable inflation environment. Market participants are keenly observing whether the Bank will opt for further rate cuts or maintain the current stance.
Conclusion: Optimism and performance ahead
While challenges and fluctuations persist, Jurrien’s overall outlook remains optimistic. With robust earnings, strategic global insights and cautious yet supportive monetary policies, the stage is set for continued performance and innovation.
