This Is Where the Rubber Meets the Road, with Jurrien Timmer

Timmer sees fiscal risk becoming more important as Treasury yields rise: U.S. nominal growth of about 6% still exceeds the 10-year yield of 5.3%, but he says the gap is narrowing, while debt has grown by almost $17 trillion since COVID and central and commercial banks are not meaningfully buying it. He also cites a 90-basis-point term premium and real rates near 300 basis points as evidence of fiscal-risk repricing.

Timmer says less predictable Fed communication can lift bond yields as investors demand compensation for uncertainty, while the Fed’s three 2025 insurance cuts were partly driven by job-loss fears that proved to be a false alarm. He also warns that heavier T-bill issuance could push up bill rates and disrupt repo markets, potentially echoing the 2019 problem that forced the Fed to cut rates.

Timmer’s valuation framework starts with earnings durability, the cost of capital, risk premiums, and shareholder distributions—not the stock price—and he says higher yields can pressure multiples even when earnings provide an offset. If yields reach 6%, he estimates the Fed model would imply a 16 S&P 500 P/E, about 20% downside in the multiple, while stressing that this would not necessarily mean a 20% price decline.

Timmer argues that earnings growth has kept the AI-related tech rally from looking like a bubble so far, with the sector’s P/E falling from about 21 to 20, but says strong earnings do not eliminate valuation risk. He points to the Nifty Fifty in 1973–74, when companies continued to deliver earnings but still suffered as valuations contracted, and notes that S&P Tech’s P/E of 21 remains far below its 70 level in 2000.

Market weakness has been uneven: a speaker described the equal-weight S&P ratio as stretched before it rose 1% in its best relative day versus the S&P since July, while Timmer says rate-sensitive groups have taken the most damage. The index is also highly concentrated, with the top 10 stocks accounting for 40% and the top 50 for 60%; Timmer links poor breadth to weaker-credit companies facing 2027–28 maturities as high-yield spreads rise.

Timmer describes a major shift in hyperscaler cash use: companies that had returned roughly 90 cents of each earnings dollar to shareholders are now directing cash flow toward capital expenditures, whose returns are less certain than buybacks. That buildout is also reflected in borrowing—hyperscaler bonds equal 14% of net new Treasury borrowing, with $500 billion of borrowing expected this year and next—and in semiconductor earnings that are up 178% year over year near a 40-month cycle rollover point.

Timmer argues that the traditional 60/40 diversification premise has weakened: oil and the S&P 500 are about 50% negatively correlated, but the S&P 500 and long-term government bonds are about 50% positively correlated. He favors considering assets less correlated with stocks and bonds, including commodities and managed futures.