Fidelity's clock strikes past midnight — earnings party might be running out of minutes 🕛

Fidelity's Jurrien Timmer said the firm's Investment Clock has moved "past midnight," with a slight tightening in financial conditions beginning to cool the earnings-driven rally in U.S. equities. Posting on X with chart data through October 11, Timmer, Fidelity's director of global macro, noted the setup mirrors the last two cycles that registered that signal, 2022 and 2018. The Investment Clock plots financial conditions against earnings growth, and the horizontal axis scores conditions against their 52-week history, with positive readings indicating tighter-than-normal conditions. The black trail tracing the market since October 2022 now ends just right of zero.

"It does appear that the investment clock has moved 'past midnight' with a slight tightening in financial conditions now starting to temper the earnings-driven price momentum," Timmer wrote. The last two cycles where this happened were 2022 and 2018. The clock's shift has coincided with climbing Treasury yields. The 10-year yield touched 5.34% on October 1, its highest since early 2002, after the Federal Reserve raised rates in September, its first hike since 2023. CME FedWatch, a futures-based odds tracker, put October Fed hike odds near 18% on October 8, while Goldman Sachs now expects the next hike in December.

Despite tighter conditions, London Stock Exchange Group (LSEG) data show analysts expect 30.6% third-quarter S&P 500 profit growth. In 2022, forward earnings still gained 6.2% as the price-to-earnings multiple fell 30%, according to Yardeni Research, and the S&P 500 slid 25.4% between January 3 and October 12 of that year. The 2018 cycle saw the index fall 19.3% from its September 20 peak to its December 24 low, per an investor letter. Timmer drew the 2022 comparison in a September Fidelity note, but pointed to trailing earnings growth near 30% as a potentially larger buffer this time.

The next test runs through the Fed's October 28 decision and the start of earnings season, with the S&P 500 closing at a record above 7,800 on October 6, according to Reuters.