A Study in Contrasts: Week of 7/14/25

This information is provided for educational purposes only and is not a recommendation or an offer or solicitation to buy or sell any security or for any investment advisory service. The views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Opinions discussed are those of the individual contributor, are subject to change, and do not necessarily represent the views of Fidelity. Fidelity does not assume any duty to update any of the information.

A Week to Remember, at Least for Bitcoin and the Mag 7

Unless you were focused on Bitcoin’s ascend to new highs or the Mag 7 celebrating a $4 trillion milestone for NVDA, it was a quiet week for the markets.  The 10-year yield continued to meander in its tight range, and the S&P 500 barely moved despite a new barrage of tariff headlines, the likes of which would have alarmed markets just a few months ago.

The second half of July will get busier, not only with Q2 earnings season and economic data but also the approach of the August 1 tariff deadline.   We will also soon get the much-anticipated quarterly refunding announcement, where we will see what tricks the Treasury Secretary has up his sleeve with regards to financing the $5 trillion One Big Beautiful Bill (OBBB).  More Bills, less bonds, as was done under the previous Treasury leadership?

After July, we get into the weakest seasonal period of the year, spanning from August through the first half of October.  The market has lurched from a post-election right tail to a tariff-induced left tail, and now back to the OBBB-induced right tail.  Where next?

What’s not to Like?

At times when the tea leaves are not as easy to read, it’s always a good idea to step back and look at some charts and ask: what’s to like, or not to like?  Below is the S&P 500.  There’s doesn’t appear to be much not to like here.  The trend is up, the index is above its trendline has been making new highs, and breadth is decent.  Momentum often begets more momentum.  At some point the index will be too far above its rising trendline, with sentiment and momentum and breadth no longer confirming those highs, but we don’t seem to be there yet.

The same can be said for international equities.  The trend is up and the MSCI ACWI ex-US index is making new highs, both in dollar terms and local currency terms.  Breadth seems solid as well, with 67% of international stocks above their 200-day moving average.  This is now a global bull market.

Ready for Earnings Season

Q2 earnings season starts this week and based on the estimate markdowns in April and May, followed by improving financial conditions and a weaker dollar, my hunch is that earnings will surprise to the upside.  The last few quarters produced a bounce of at least 500 bps, so we’ll see if that pattern repeats.

Capex and Buybacks on the Rise

In the US, both share buybacks and capital spending have been improving, in absolute terms and as a percentage of revenues.  Those revenues have continued to trend higher for the S&P 500.  There appears to be nothing not to like!

Priced for Success

The rub, of course, is that all this positive fundamental context is already priced in, with the S&P 500 index now trading at 36 times free cash flow.  That’s back to the nose-bleed levels seen late last year.  For the equal-weighted index the multiple is not quite as high (27x), but still near the highs of its historical range.  The market is priced for success, betting on another fiscal impulse from the OBBB.

This brings me back to my question from last week.  Looking only at the top panel, would you want to be long this chart?  The answer is likely yes.  But if you add the bottom panel to the mix, do you still want to be long this chart?  That answer is likely not as easy.  Starting points matter, and in terms of valuation, this is a tricky starting point.

Inflation Complacency

Whether the fiscal impulse from the OBBB  (not to mention tariffs) will cause another inflation wave is an important question, not only for the Fed as it contemplates the timing of its next rate cut, but for fixed income and equity valuations as well.  Below we see that the TIPS 5y5y forward break-even has been stuck in a tight range of 2.0-2.5% since the COVID spike in 2020.  Nothing to see here.  Well, we’ll see.  If inflation does wake up again, it could be a problem for both the equity risk premium and term premium, both of which are on the low side of their historical range.

Sentiment

The good news for equities is that sentiment is hardly at an extreme, with both the Investors Intelligence (II) and American Association of Individual Investors (AAII) surveys at “meh” levels.  And looking at that “mountain of cash” sitting in money market funds, its ratio to the stock market’s capitalization is at exactly its long-term average of 10.7%.  There is no sentiment extreme, which should allow the wall of worry to be climbed further.

For the Fed, Limited Room to Cut Rates

The Fed remains on hold, which in my view is the right thing to do.  If neutral is 3.5-4.0% (inflation + 100 bps), the Fed should only cut rates a few times before returning from restrictive to less restrictive to neutral.  Anything more is not justified given that inflation remains above target and the jobless rate is below the “full employment” rate (formerly NAIRU).  The Taylor rule says the Fed should be slightly above neutral, which is where it is.

A Coiled Spring for Bonds

As for the long end, bonds continue to churn in a narrow range, and I am pleasantly surprised that yields haven’t already moved above 4.5%.  Nothing good happens above 4.5%.  The term premium has reverted from its -146 bps financial repression extreme in 2020 to a much more reasonable +83 bps. Whether it keeps rising will likely depend not only on inflation but also the debt composition of the OBBB.  We will find out more soon when the quarterly refunding announcement is released.

Fiscal Dominance, Chapter 2

With the debt ceiling now passed, the debt is rising again and the jaws between what the Treasury is selling and what the Fed is buying continue to widen.  This will only last for so long, in my view.

We are now in round two of fiscal dominance, with the first $5 trillion helicopter drop taking place during COVID and now the second one about to get underway from the OBBB.  The math is simple but difficult: as long as nominal GDP growth outpaces the funding rate (10-year Treasury yield), the debt can be considered sustainable.  Hopefully, that happens, as a capex cycle from both the OBBB and the AI boom increases productivity and therefore the non-inflationary speed limit for the US economy.

If not, and if the term premium rises further, in a few years we could have an unsustainable debt spiral on our hands, requiring the Fed to re-enter the bond market to suppress the term premium once again.

You Can Control Rates but You Can’t Control Currencies

If the Fed is forced back into the bond market to hold down nominal and real rates, the dollar may well lose more of its supremacy premium.   Currencies are the release valve for unsustainable fiscal policy, as Japan found out a few years ago.  The same is now true for the dollar, which continues to lose strength despite the Fed’s hawkish policy stance.

Cleanest Dirty Shirt no More?

Other than the Swiss Franc, the dollar is the strongest currency in the world.  The greenback as well as US bond yields have benefited the US being the “cleanest dirty shirt” in a world economy weighed down by a crushing debt load.  The question is whether the US will continue to enjoy that privilege in an era of fiscal dominance.  The surging price of gold and bitcoin seem to say “no.”

Bitcoin Anticipates the Next Chapter

Both gold and Bitcoin are seeing this coming from a mile away, it seems.  If the Fed is at some point forced to execute another QE (quantitative easing) wave to monetize a second fiscal wave, then the ensuing double-barreled liquidity impulse could create enough liquidity to support the next wave for gold and Bitcoin. That would put us back in the late 1906’s mode, when both fiscal and monetary policy were very loose.

Different Players, Same Team

With both liquidity as well as the stock market rallying, it’s no surprise that Bitcoin is making new highs and taking the baton from gold for a while.  You can see that clearly from the diverging Sharpe Ratios below.

BTC Adoption

For Bitcoin, the adoption curve has continued to grow, as evidenced by the ongoing influx of capital entering the scene via the various ETPs.  Whether these flows are from true believers or “momentum renters” is hard to tell.

The Bitcoin chart shows a clean stairstep process of new highs followed by consolidations followed by new highs.  As such, Bitcoin has continued to follow both the Power Law curve of its wallets as well as my demand model based on the internet adoption curve from a few decades ago.  We are right in the middle.

Fair Value?

The one “devil’s advocate” challenge to the otherwise unmistakably bullish narrative driving gold and Bitcoin is the question of how much of this fiscal dominance and de-dollarization playbook is already priced in.  The combined value of above-ground gold and Bitcoin is now around $25 trillion, which is higher than the US money supply, and at levels that have previously marked tops.  Like the valuation chart for equities, if the thesis is priced in, the trade may not be the slam dunk that it seems.

In my view, we are not even close to that point, in part because the global money supply is five times larger than the US money supply (and this is a global theme), and because the dollar is still at historically high levels while the term premium is still modest.  So, I am guessing we are still in middle innings for the hard money trade.

The Grass is Greener Across the Atlantic (and Pacific)

If the dollar does lose some of its supremacy premium, while global earnings are converging on US earnings and non-US valuations are lower than in the US, it should provide a good backdrop for a prolonged period of mean reversion between US and non-US equities.

The two charts below show just how important the currency component can be for investing globally.  That’s especially the case for emerging markets, where the USD-based EM index (solid blue) has vastly outperformed the local currency index (dotted line) over the past 25 years.  In local currency terms, the MSCI EM index is where the S&P 500 was in the year 2000.

For EAFE (non-US developed), that currency difference is much less.  For me, that makes EAFE an easier region to say yes to than EM. Either way, the momentum curves in both charts suggest that the long-awaited mean reversion is upon us.

1188536.28.0