Fidelity’s Jurrien Timmer says the Investment Clock has moved “past midnight” as tighter financial conditions begin to cool earnings-led gains. He flagged 2018 and 2022 as the last two cycles with that setup.
Fidelity’s Investment Clock plots financial conditions against earnings growth, and it reads only slightly tight. However, London Stock Exchange Group (LSEG) data show analysts expect 30.6% third-quarter S&P 500 profit growth.
Why is a slight tightening starting to bite now?
Timmer, Fidelity’s director of global macro, posted the reading on X using chart data through October 11.
“It does appear that the investment clock has moved “past midnight” with a slight tightening in financial conditions now starting to temper the earnings-driven price momentum.”
Jurrien Timmer, Fidelity (X post)
The horizontal axis scores financial conditions against their 52-week history. Positive readings mean tighter-than-normal conditions. The black trail tracing the market since October 2022 now ends just right of zero.
Meanwhile, Treasury yields have climbed alongside the shift. The 10-year yield touched 5.34% on October 1, its highest since early 2002. The Federal Reserve raised rates in September, its first hike since 2023.
CME FedWatch, a futures-based odds tracker, put October Fed hike odds near 18% on October 8. Goldman Sachs now expects the next hike in December.
Can 30% earnings growth outrun the 2022 playbook?
In 2022, earnings kept rising even as valuations shrank. Forward earnings gained 6.2% as the multiple investors pay for them fell 30%, Yardeni Research found.
The S&P 500 slid 25.4% between January 3 and October 12 of that year. Shrinking multiples led that decline. Similarly, in 2018 it fell 19.3% from its September 20 peak to its December 24 low, an investor letter calculated.
Timmer drew the 2022 comparison in a September Fidelity note. In contrast, he said trailing earnings growth near 30% could offer a bigger buffer this time.
The test now runs through the October 28 Fed decision and earnings season. The S&P 500 closed at a record above 7,800 on October 6, Reuters reported.
Therefore, with 10-year yields above 5% in early October, profit growth may need to outpace shrinking valuations.
