U.S. equity investors might be experiencing the early stages of a new bull market, despite notable signs to the contrary, according to a midyear outlook from Fidelity.
While stocks overall are up this year, Jurrien Timmer, Fidelity Management & Research Co.'s global macro director, noted that just a few mega-cap stocks have fueled those gains.
"That looks inconsistent with the idea that we're in a new bull market, since early bulls tend to be characterized by broad-based gains and rising small caps, which we haven't seen. That said, earnings have continued to prove surprisingly resilient," he wrote in a new post on Fidelity's website.
"With each decent earnings season we see, it becomes less likely that the market takes another leg down and more likely that we're already in the start of a bull market," Timmer added.
He outlined several indications that a bull market may have started while also examining more bearish signals.
The stock market has been in limbo for a year, "and it makes me wonder whether the strength in the S&P 500 in recent weeks could indicate that the next, or current, bull market is finally declaring itself," Timmer wrote.
If the recent strength had been broad based, he said, "it would be easy to call this a new bull market. But the opposite has been true. Because the S&P is weighted by market capitalization, the largest companies have an outsized influence on its movements."
While a few mega-caps have driven gains, he wrote, "the rest of the market has languished." Small- and micro-cap stocks have lagged this year, which doesn't suggest a bull market, Timmer wrote.
"Early-cycle bull markets tend to be driven by segments and styles that are more economically sensitive and more volatile," with small- and micro-cap indexes usually in or near the leader, he said. "So their weakness this year hasn't looked consistent with a new bull market."
Timmer said he wondered whether a new bull market that doesn't look like previous new bull markets might be quietly underway, or whether a big market-clearing rout is right around the corner.
Market bears and bulls both have cases, he noted.
"The bearish outlook is that the much-anticipated recession is going to finally arrive, and that we are on the brink of an earnings washout that will trigger another down leg — in what will prove to be a prolonged bear market," Timmer said.
The bullish outlook holds that interest rates have peaked, the Federal Reserve is done raising them, the economy is holding up and earnings will rebound later this year, he said.
Earnings Resilience
Earnings have proven "surprisingly resilient" so far this year, and "estimates seem to weigh in favor of the bulls, with consensus estimates expecting that earnings growth is bottoming now, and will return to a 10% growth rate in 2024," Timmer said.
