Is Wall Street's mature cycle nearing its peak?

Jurrien Timmer, Director of Global Macro at Fidelity Investments. He is responsible for analyzing global business cycles, valuations and allocation strategies.

In this analysis, he combines historical analogies, valuation models and shareholder distribution data to explain where we are and where the market may be headed. His central message is that the rise in the US remains largely “value-driven” (price multiples), while developed international markets are gaining momentum.

He notes that the US market has been on a long uptrend since 2009 (as he counts it). The question now is not whether this trend has been there, but how it will end: “quietly” or “noisily.” He recalls that the 1982–2000 period ended loudly with the dot-com bubble, while the 1949–1968 period ended more smoothly, with modest new highs and increasingly large corrections. The chart below captures this difference in endings.

So far, the current long-term trajectory is more reminiscent of the 1960s than the late 1990s. This is where the model comes in. CAPE — cyclically adjusted price-to-earnings ratio, where earnings are measured as a 10-year average to smooth out cycles. Higher valuations today (high CAPE) portend lower future returns, but a peak is often preceded by an acceleration phase. This, he says, is likely to happen in the coming years.

Although the bullish phase has already lasted for 16 years, historical analogies from the 1949–1968 and 1982–2000 periods suggest that there may still be a few more rounds of bullishness left, with the potential for new consecutive highs. Based on the regression lines, these two patterns align closely with the current trajectory, reinforcing the view that the super-cycle is not yet complete.

For many years, US stocks dominated, while non-US markets simply looked cheap, but without any real fundamental catalyst.

That has changed recently — at least for the developed international markets covered by the MSCI EAFE (Europe, Australasia & Far East) index, which includes countries such as the United Kingdom, France, Germany, Switzerland, Spain, Italy, the Netherlands, Sweden, Australia, Japan, Hong Kong and Singapore.

July 2025: The MSCI USA index trades at a forward P/E of 22.5x, a 5-year CAGR of 6% and a payout ratio of 76%. The MSCI EAFE index has a similar payout ratio of 77%, but a higher CAGR of 10% and a much lower multiple of just 14.5x. On the other hand, the MSCI EM (Emerging Markets) index, which includes countries such as China, India, Brazil, Taiwan, South Korea, South Africa, Saudi Arabia, Mexico, Thailand and Indonesia, has an even lower multiple of 13.2x, but a weaker CAGR of 5% and a significantly lower payout ratio of 46%.

The scatterplot compares the forward P/E (price to expected earnings – how much an investor pays for each unit of future earnings) on the vertical axis and the payout ratio (the percentage of earnings returned to shareholders through dividends and buybacks) on the horizontal axis. The size of each dot corresponds to the 5-year compound annual growth rate (CAGR). In the logic of discounted cash flow, what ultimately reaches the shareholder – the payout – is more important than the company’s “gross” earnings.

Based on the data, developed markets outside the US (EAFE) appear to outperform on the valuation-fundamental front. They offer similar or even stronger distribution dynamics than the US, but with a significantly lower multiple.

The chart of global dividend growth shows that developed countries outside the US have gained significant momentum, both in terms of dividend size and as a ratio to earnings. In other words, today one can get comparable – and in some cases better – fundamentals by paying about two-thirds of the price that US stocks are asking.

The expansion of global markets is a positive development for investors and fund managers: it offers a wider range of options and reduces reliance on a few large companies in the U.S. Timmer believes this trend will continue, with interest shifting away from the SPX 493 or the weighted index, towards a strategy that emphasizes the capitalization-weighted S&P 500 and international diversification.

In this context, the “Periodic Table of Investment Returns” acts as a visual reminder that performance “champions” change frequently, so dispersion remains essential.

In the US market, since the cyclical low of October 2022, the rise has been based mainly on valuations: the S&P 500 is gaining 84% in price, corporate profits are only 18%, while the P/E ratio has increased by 48%.

It is common for valuations to lead in the first 12–24 months as the market “prices in” future earnings; however, the fact that they remain ahead even after 34 months is considered unusual. A more substantial contribution from the earnings side is now required for sustainable continuity.

As impressive as the recovery was after the sudden disruption in April, triggered by concerns about new tariffs, the moves in international markets were even stronger. The extension of the rally has left large parts of the US market out of the picture, turning attention to international stocks.

Timmer likens the current picture to a “dumbbell-shaped market”: at one end are high-growth US companies with premium valuations, and at the other, developed international markets, which offer more attractive multiples and growing distributions.

Conclusion: The uptrend remains in place, but in the US the impetus comes mainly from rising price multiples, which cannot support the market indefinitely without a parallel increase in earnings. In contrast, developed international markets combine more attractive valuations and growing distributions, reinforcing the scenario for greater international exposure.

A “barbell” approach places funds at both ends: on the one hand in high-growth US stocks, on the other in international values with more favorable valuations and strong cash flows, thus seeking a balance between growth potential and return stability.

Source of charts & commentary: Fidelity (Jurrien Timmer). For informational purposes only; not an investment recommendation.