Fidelity's Jurrien Timmer Explains The Importance Of Upcoming Earnings Season: 'If This Is An Aspiring New Bull Market...'

Jurrien Timmer, Director of Global Macro at Fidelity, believes the upcoming earnings season is important and said that in order to justify the current trend as an aspiring bull market, the second quarter results will have to get better.

‘If this is an aspiring new bull market and not a bear market rally, it will be up to earnings to continue to get "less bad" in the coming months, and for the Fed to get closer to the end of its tightening campaign. The market can look past an earnings valley, but it needs the help of easier liquidity conditions to get there,' Timmer said in his tweet.

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The S&P 500 is presently trending at about 19x its estimated 12-month earnings which is above its historic average of 15.6x, according to a recent Reuters report. Goldman Sachs said that historically, the index has seen a median drawdown of 14% over the next 12 months when valuations stand at current levels or above, compared with a 5% drawdown over a typical 12-month period, according to the report. Notably, the index has gained over 14% since the beginning of the year, according to Benzinga Pro.

Timmer says the market's current valuation pivot will be justified if earnings bottom out late this year while showing just a modest drop. ‘The market has moved on from following the rate cycle and is looking towards an earnings recovery to justify its 19x P/E ratio. If the Fed is indeed in the 8th or 9th inning of its hawkish campaign and earnings are bottoming in late 2023 after only a modest decline, then this valuation pivot seems justified,' Timmer said.

Fed Action: The central bank indicated during its June policy announcement — when it paused its rate hike cycle — that it will raise rates by another 50 basis points this year. Latest economic data, however, has sparked optimism among investors as Consumer Confidence Index rose to 109.7 in June from 102.5 in May and U.S. new home sales jumped 12.2%. The SPDR S&P 500 ETF Trust SPY closed 1.1% higher while the Invesco QQQ Trust Series 1 QQQ gained 1.72% on Tuesday.

"The market seems convinced that the Fed will back off in the near future, but that’s not a sure thing. The central bank is expected to raise rates again in July, before eventually pivoting back towards a more neutral rate of around 3-3.5%," Timmer said in his tweet.

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