According to Woofun AI, Julian Timmer, head of global macro strategy at Fidelity (Fidelity), issued a serious warning, indicating that the current “investment clock” has officially crossed the dangerous metaphor point of “midnight.” This judgment did not come out of nowhere; rather, it closely refers to the two historical cycles of 2018 and 2022, where the economy experienced a downward trend, and suggests that the market may be entering a similar pre-recession range.
The underlying reason is that the increasingly tense financial environment is eroding the upward momentum in stock prices driven by financial performance. According to a chart released by Timmer on the X platform on October 11, the positive value of the indicator measuring the financial environment compared to its 52-week historical level means that the environment is more tense than normal, and the market trend curve is slightly to the right of zero, which is highly consistent with the trend since October 2022.
Meanwhile, yields on bonds issued by the US Treasury rose significantly. On October 1, the yield on 10-year US Treasury bonds hit 5.34%, the highest since the beginning of 2002. In terms of monetary policy, the Federal Reserve raised interest rates for the first time since 2023 in September, while data from the CME (CME.US) FedWatch tool on October 8 showed that the probability of raising interest rates again in October was about 18%, and Goldman Sachs (GS.US) further predicted that the next rate hike would occur in December.
Although data from the London Stock Exchange Group indicates that analysts expect the S&P 500 profit growth rate to reach 30.6% in the third quarter, the depressing effect of the high interest rate environment on valuations is still significant.
Woofun AI compiled data and showed that from a structural point of view, the historical review revealed the huge impact of declining valuation multiples on the market index. Research by the Yardeni Research Institute indicates that in 2022, the S&P 500 index fell sharply by 25.4% between January 3 and October 12 due to a 30% decline in the valuation multiplier, even though investors expected future profits to increase by 6.2%. Similarly, the 2018 data confirmed this logic, as the index fell 19.3% from its peak on September 20 to a low on December 24.
Notably, Timmer's comparative analysis in a report released by Fidelity in September suggests that the current profit growth rate of close to 30% may provide a stronger buffer to offset the negative impact of some valuation contractions.
The more critical variable is the upcoming verification of macro-events. The current test will continue until the Federal Reserve's decision on October 28 and the subsequent earnings season. The S&P 500 index hit a record high of more than 7,800 points at the close of trading on October 6, but in the context of 10-year US Treasury yields above 5% in early October, corporate profits must grow faster than the rate of falling valuations in order to maintain the current pattern of high volatility; otherwise, the market may not escape the fate of history repeating itself.