Parallel to Nvidia's (NVDA) market push last week, corporate earnings have become a resonant factor in equities as the Federal Reserve decides on clear interest rate messaging.

Fidelity Investments Director of Global Macro Jurrien Timmer comments on the earnings narrative amid persisting inflation.

"If you think about valuation of the stock market, the discounted flow model, valuation is the present value of future cash flows or earnings. and last year earnings fell ever so slightly by 2.5%," Timmer tells Yahoo Finance. "But when there's no earnings growth, the denominator of the discounted cash flow model — interest rates — become important. So the market becomes obsessed with how restrictive or how accommodative the Fed gets because you don't have that earnings cushion to support the market."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

- Another storyline seemed to be, at least, a lot of investors seem to think, listen, the Fed needs to cut early and often for this market to move higher. But now we see investors actually really tempering their forecasts here of both when the Fed will cut and how deeply, and yet still the market moves higher. What do you make of that dynamic?

JURRIEN TIMMER: Yes. That's a very good observation and the market, I think was always a little bit over. Its skis expecting 6 plus rate cuts from the Fed like this year. I mean, that would only happen in a recession and we're pretty far from a recession right now. The Fed indicated itself at its December FOMC meeting that three rate cuts would be appropriate. And I think that's correct. Because inflation is moving lower, the core PCE is now at 2.8% which is a far cry from the 5.6% at its peak.

So the Fed needs to cut rates somewhat just to keep pace with that. Because Fed policy should be measured in real terms. So if inflation moves down, and the Fed funds rate does not move down, then in real terms, the Fed actually would be getting more restrictive which is not appropriate at this point. But you indicated something important, which is that the market doesn't seem to be quite as focused anymore on how soon and how many rate cuts.

And that's because earnings are starting to do the heavy lifting now. So if you think about valuation of the stock market, the discounted cash flow model, valuation is the present value of future cash flows or earnings. And last year earnings fell ever so slightly by 2.5%. But when there is no earnings growth, the denominator of the discounted cash flow model, interest rates become very important.

So the market becomes obsessed with how restrictive or how accommodative the Fed gets. Because you don't have that earnings cushion to support the market. Now earnings are growing. We're just wrapping up fourth quarter earnings season and the growth rate is about 8%. So that's pretty good. And when that happens, the interest rate part of the DCF model is still important.

But it becomes a little bit less important because earnings are doing the heavy lifting. And I think that's why we're hearing less of a focus on how quickly will the Fed cut and how many times.