Fidelity’s Jurrien Timmer Explains the Outlook for US Stocks

It’s been a banner year for stocks, and one veteran analyst thinks the outlook is also good for 2025. The Morningstar US Market Index has returned more than 28% in 2024 and is up 75% since bottoming out in October 2022.

Jurrien Timmer, director of global macro at Fidelity Investments and a 30-year veteran of the firm, says stocks can continue to rally for a third straight year in 2025. “Earnings are growing, sustaining the bull market,” he says. A strong economic landscape is also supporting equities.

But with valuations already stretched, he says investors shouldn’t bank on another year of blockbuster returns like 2024: “We’re in year three of a bull market, and the valuation side becomes more challenging as it matures.”

US Stock Market Performance

What Drove 2024’s Stock Market Rally?

“Obviously, it’s been a very good year,” Timmer says. He attributes that performance to powerful earnings growth, with gains amplified by rising valuations. Public companies increased their profits over the past year and at the same time, investors have signaled that they’re willing to pay a higher premium for those profits. The result has been rising stock prices and powerful returns for investors.

Timmer doesn’t see a repeat of this effect in 2025. The S&P 500 Index’s trailing 12-month price/earnings ratio is hovering around 28; a year ago, it was closer to 23, and the long-term average is around 20. By Morningstar’s measure, the stock market is trading at a 6.8% premium to its intrinsic value, compared with a 2.9% discount at the beginning of the year. Next year, “getting that extra kick from valuations is going to be harder because valuations are already pretty high,” Timmer explains.

Magnificent Seven Valuations Aren’t Overdone—Yet

One of investors’ biggest concerns over the past year or so has been the climbing valuations of the so-called “Magnificent Seven,” a group of mega-cap technology companies comprising Nvidia NVDA, Apple AAPL, Alphabet GOOGL/GOOG, Amazon.com AMZN, Microsoft MSFT, Meta Platforms META, and Tesla TSLA.

These stocks have seen outsized returns over the past 18 months thanks to the development of artificial intelligence technology, but they’ve gotten relatively expensive in the process. For now, Timmer says, they justify their hefty premiums. Their earnings are growing faster than the rest of the market, supporting a higher price. “So far, it is not a valuation problem,” Timmer says.

He also emphasizes that AI-driven gains don’t look like a bubble, despite the warnings of some pundits. “It can’t be a bubble until the valuations are excessive,” he says, and thus far they are not. On top of that, Wall Street earnings estimates for these stocks continue to show robust growth in the months ahead.

Stock Market Participation Has Broadened

Another source of momentum for investors in 2025 is a broad-based rally that isn’t confined to the Magnificent Seven. “My sense is that we’re actually in a pretty good place in the market, even though, on a relative basis, the Magnificent Seven are kind of stealing the show,” Timmer says. He points out that more than three-quarters of the stocks in the S&P 500 are trading above their 200-day moving average (a sign of a durable rally), and earnings growth is happening throughout the index.

Timmer says bull markets typically start with broad performance and narrow as they age, but this cycle started narrow and is broadening. “It’s a good story,” he says. “The market is pretty broad-based, and that gives me some confidence that even though we’re now in the third year of a bull market, in some ways, the bull market is getting younger instead of older.”

Risks to the 2025 Stock Market Outlook

Even against a positive backdrop, risks remain. Timmer points to the possibility that the Magnificent Seven trade could unravel. Because of the group’s heavy weighting in the major indexes, any stumble could mean losses for investors, even if other stocks and sectors continue to outperform.

“You could be in a very ironic situation where … 77% of the stocks [in the S&P 500] are doing well but you’re not reaping the benefits because the cap-weighted index is being dragged lower by just seven stocks,” Timmer says. “We’re not there yet, and we may not ever get there, but that is one thing on the radar for 2025 and beyond.”

Another risk has to do with inflation. If the economy begins to accelerate before inflationary pressures are back at sustainable levels, losses in the bond market may follow as yields rise. Stubborn inflation could impact Fed policy if the central bank is forced to raise rates, and it could impact affordability for consumers and homebuyers. It could also make the government’s debt obligations more expensive. “That would be a snowball factor,” Timmer says.

And then there are the unknowable risks—developments in geopolitics, trade, or the global economy that are impossible to predict but could impact portfolios. Timmer says the best strategy in such cases is staying the course: “There are always reasons to lose sleep at night, and there’s not always a lot we can do about it. As an investor, you just have to be in a well-diversified portfolio that hopefully allows you to withstand the occasional headline risk.”

Look Broadly for Returns Across the Market

With 2025’s outlook less certain, Timmer says investors can benefit from one of the first lessons of investing: diversification. “Have a balanced portfolio that makes sense,” he advises. “Don’t be out over your skis in any particular sector or space. Don’t chase stuff just because the price is going up.”

He also recommends a broader approach to markets beyond traditional rules of thumb. Where a classic 60/40 stock and bond index portfolio may have been unbeatable in past decades, for instance, the outlook is more complicated today, with bond yields rising and the stock market more heavily concentrated.

“Now, I think you can go into other spaces” to boost returns, Timmer says. “You can buy an equal-weighted fund, or a small cap fund, or you can try your hand in international … there are different bond strategies, there are multi-asset income strategies, high-yield corporate bonds, bank loans, there’s a lot of a lot of little buckets that, if you’re creative, you can choose from.”

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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