• The market has lost momentum and breadth as prospects for more rate cuts in 2025 have dimmed.
  • Although it is still believed we’re in a bull market (with earnings poised to potentially lift stocks higher), we may be in the later stages, when things become more volatile.
  • One particular source of volatility has been pressure from rising long-term interest rates, combined with high valuations.
  • It is believed rising long-term rates could be a recurring source of volatility for the market in 2025.

Jurrien Timmer, director of global macro at Fidelity, shares his expert analysis of the current market trends and the potential challenges investors may face in 2025. From the impact of a stronger-than-expected jobs report to the influence of rising interest rates, Timmer explores the dynamics shaping the stock market and provides key insights into what lies ahead.

Key Market Trends

  1. Volatility Amid High Valuations:
    The recent market dip following strong employment data underscores the market’s sensitivity to interest rate changes. With price-to-earnings (PE) ratios remaining high, even minor disruptions could lead to significant volatility as the bull market enters a more mature phase.
  2. Narrow Market Leadership:
    Despite broadening market participation in late 2024, only 24% of stocks are now trading above their 50-day moving averages. The “Magnificent 7” continue to dominate, but prolonged trends in market leadership may give way to sharp mean reversion in the future.
  3. Interest Rate Sensitivity:
    The labor market’s strength leaves little room for additional Federal Reserve rate cuts. Meanwhile, the yield curve is steepening as 10-year Treasury yields rise due to increasing term premiums. This shift could weigh on equities, especially as bonds become more attractive compared to stocks under the “Fed model.”

Rising Earnings: A Silver Lining

Fourth-quarter earnings season begins with analysts projecting 7% annual growth. If earnings follow historical trends and beat estimates, double-digit growth could offset valuation pressures. Earnings growth of 11.2%, 9.5%, and 12.7% is forecasted for subsequent quarters, offering hope for sustained market momentum.

Market Outlook for 2025

  • Earnings vs. Rates:
    Timmer highlights the tug-of-war between rising corporate earnings and upward pressure on long-term interest rates. As earnings grow, they may counteract the negative impact of higher valuations driven by rate increases.
  • Investor Strategy:
    Long-term investors are encouraged to stay focused on goals-based strategies. While volatility is expected, the combination of strong earnings and market resilience could present opportunities for disciplined investors.

Jurrien Timmer provides a balanced perspective on the forces shaping the 2025 market landscape. As rising rates challenge valuations and earnings continue to grow, investors should prepare for a year of potential volatility and opportunities, guided by thoughtful, long-term strategies.

Disclosure: This article does not represent investment advice. The content and materials featured on this page are for educational purposes only.