FidelityConnects: Denise Chisholm – Sector watch – January 15, 2026

00:06.706 --> 00:08.408
Hello, and welcome to Fidelity Connects.

00:08.408 --> 00:12.579
I'm Pamela Ritchie. US CPI was released earlier this week and it came in

00:12.579 --> 00:17.450
cooler than expected. We saw core inflation slowing to 2.6%,

00:17.450 --> 00:21.187
this is for the month of December, of course, below forecast reinforcing the

00:21.187 --> 00:25.358
idea that inflation pressure is easing even as growth holds

00:25.358 --> 00:29.162
up. The real story perhaps isn't just CPI.

00:29.162 --> 00:34.234
It's why inflation can cool without breaking the cycle.

00:34.234 --> 00:38.471
The answer sits in productivity and also unit labour costs,

00:38.471 --> 00:40.273
according to our next guest.

00:40.273 --> 00:44.344
Joining us now to connect the dots between the inflation print,

00:44.344 --> 00:48.448
productivity and profit margins is Fidelity Director of Quantitative

00:48.448 --> 00:50.216
Market Strategy, Denise Chisholm.

00:50.216 --> 00:53.787
Hello, good morning to you. Is it snowy there?

00:53.787 --> 00:56.389
No snow here. I heard you're having a snow day.

00:56.389 --> 00:58.725
I hope it's coming our way. I like snow.

00:58.725 --> 01:02.195
I know. It's looking quite beautiful if you're not trying to get somewhere,

01:02.195 --> 01:04.230
essentially.

01:04.230 --> 01:07.567
In any case, great to have you here. Speaking of cooling, it looks like

01:07.567 --> 01:12.172
inflation is up a bit but certainly not as much as expected.

01:12.172 --> 01:14.441
It's kind of what you've been saying for some time.

01:14.441 --> 01:18.111
I guess the question is what stands out to you?

01:18.111 --> 01:23.216
Unit labour costs, as you mentioned, stand out to me from a predictive sense.

01:23.216 --> 01:26.319
The way you think about unit labour costs, which are always released quarterly

01:26.319 --> 01:30.623
in the productivity report, is basically a productivity adjusted

01:30.623 --> 01:34.627
wage. They are now anomalous, by

01:34.627 --> 01:38.865
my definition, in that they're growing at the bottom quartile

01:38.865 --> 01:43.369
of their history. What that means is wage growth is still slowing.

01:43.369 --> 01:47.173
That's important to understand because as much as we're worried about a very

01:47.173 --> 01:51.177
tight labour market the low unemployment rate the US has

01:51.177 --> 01:55.115
is not a particularly good predictor of slack or not slack.

01:55.115 --> 01:59.252
Because if it was quite tight you wouldn't see the continued

01:59.252 --> 02:01.154
deceleration in wages.

02:01.154 --> 02:05.391
The deceleration in nominal wages is still happening but that's

02:05.391 --> 02:09.195
not the reason why unit labour costs alone are growing in the bottom quartile

02:09.195 --> 02:13.333
of their history, it's that combined with productivity.

02:13.333 --> 02:16.703
Corporate America is getting more bang for their buck.

02:16.703 --> 02:21.040
Now, most investors will gravitate to the productivity part of the

02:21.040 --> 02:24.878
report but the interesting part for me is unit labour costs are most

02:24.878 --> 02:29.382
correlated, from a predictive standpoint, to profit margins.

02:29.382 --> 02:33.353
If we're thinking about Denise's thesis coming into 2026

02:33.353 --> 02:36.756
is that, well, one, we talked about the labour market, labour market is

02:36.756 --> 02:41.027
probably likely to get better, not worse, and earnings growth is

02:41.027 --> 02:45.265
likely durable, I think you can start to stress test those thesis

02:45.265 --> 02:47.800
points as the data comes in.

02:47.800 --> 02:52.338
Last time we talked about the NFIB survey actually jumping quite a bit for

02:52.338 --> 02:56.342
employment and that's a pretty good leading indicator suggesting that maybe

02:56.342 --> 02:59.179
employment does get better this year than last.

02:59.179 --> 03:03.349
This is a good data point suggesting that that durability

03:03.349 --> 03:07.554
of earnings growth is likely persistent because the lower unit labour costs

03:07.554 --> 03:12.091
have been historically the higher profit margins are as well.

03:12.091 --> 03:16.095
So 2026, despite the fact that stocks have been up three years in a row coming

03:16.095 --> 03:20.433
into it, it looks to me, based on the best data that we have released,

03:20.433 --> 03:24.304
that profit margins are still set to expand, which means that earnings growth

03:24.304 --> 03:28.241
is durable which underpins the dynamic of the secular bull market

03:28.241 --> 03:29.642
that we've talked about.

03:29.642 --> 03:33.646
Which means companies are making money, more money, their margins are

03:33.646 --> 03:37.684
there, which means they're okay, which means what for

03:37.684 --> 03:39.752
the Fed?

03:39.752 --> 03:41.821
It means like a self-reinforcing cycle.

03:41.821 --> 03:45.792
I think, to your point, back to the productivity angle of the report, if you

03:45.792 --> 03:49.162
say, what does this correlate to, again, sort of I'm looking for those

03:49.162 --> 03:52.966
stair-step patterns, that monotonic historical relationship, the lower unit

03:52.966 --> 03:57.103
labour costs are the lower inflation usually is.

03:57.103 --> 04:02.008
So juxtapose this with the '70s and '80s where unit labour cost were 5%

04:02.008 --> 04:05.979
and accelerating to 8, ours are growing at 1.2.

04:05.979 --> 04:10.016
That's what the Fed, in some ways, looks at and says, well, how sustainable

04:10.016 --> 04:14.287
is any price rise in energy, in food if

04:14.287 --> 04:16.956
unit labour costs are so slow?

04:16.956 --> 04:20.994
It becomes less likely that those price spikes that we see in any given,

04:20.994 --> 04:24.130
you know, airfares or whatever is durable.

04:24.130 --> 04:26.165
The Fed really looks at the report.

04:26.165 --> 04:30.670
It usually correlates to lower inflation and an easier

04:30.670 --> 04:34.741
Fed. That's important because that starts the sort of

04:34.741 --> 04:38.077
self-reinforcing cycle back to earnings growth.

04:38.077 --> 04:40.980
So if you think about two clicks ago, and you can see all these charts if you

04:40.980 --> 04:44.984
want to go to LinkedIn, it's charts of the week when we're talking about

04:44.984 --> 04:46.753
unit labour costs.

04:46.753 --> 04:50.757
You can see the very clear relationship that we've seen over

04:50.757 --> 04:55.328
the last two quarters where we started in a much higher capacity

04:55.328 --> 04:59.632
of unit labour costs in 2024 and for each click you go

04:59.632 --> 05:03.803
down you see a very clear relationship to better

05:03.803 --> 05:08.241
earnings growth. So you have an easier Fed and

05:08.241 --> 05:12.245
real rates are now slipping into the bottom half of the

05:12.245 --> 05:16.349
duration, which we haven't seen in quite some time, and that sustains

05:16.349 --> 05:18.251
earnings growth going forward.

05:18.251 --> 05:22.355
We talked a lot last year about the CapEx cycle and

05:22.355 --> 05:26.292
the CapEx cycle starting a virtuous cycle in that if

05:26.292 --> 05:30.763
corporate America spends it usually pulls forward growth which increases

05:30.763 --> 05:33.266
the odds that corporate America will spend.

05:33.266 --> 05:37.303
Think of this in the same way as it relates to inflation and the Fed.

05:37.303 --> 05:41.341
The easier the Fed becomes as measured by real interest rates

05:41.341 --> 05:45.678
the more likely earnings is to be higher and the more durable it is.

05:45.678 --> 05:50.316
Going into 2026 we've got two virtuous cycles at

05:50.316 --> 05:52.885
our backs making, what I always call, Goldilocks.

05:52.885 --> 05:56.422
As much as you say, yeah, well Denise, you're predicting Goldilocks.

05:56.422 --> 06:00.593
Well, Goldilocks has the highest odds because once these cycles

06:00.593 --> 06:04.364
get started they tend to be self-reinforcing.

06:04.364 --> 06:08.334
Take us into the unit labour cost and sort of how we should when we hear this

06:08.334 --> 06:12.305
term think about it. Something about it, it's going towards

06:12.305 --> 06:16.409
people being more productive for, yeah, getting more

06:16.409 --> 06:20.646
bang for their buck. But you just think it almost rhymes with sort of

06:20.646 --> 06:24.884
a gig economy approach to things, breaking things down into smaller pieces.

06:24.884 --> 06:28.121
Are there any ramifications to read into that?

06:28.121 --> 06:32.024
Right now it sort of rhymes with the jobless recovery because we haven't seen

06:32.024 --> 06:35.795
payroll growth. Payroll growth is bottom decile levels historically, maybe not

06:35.795 --> 06:39.565
bottom decile, certainly bottom quartile levels when you look back in history.

06:39.565 --> 06:41.634
We're bumping around zero.

06:41.634 --> 06:45.505
What it tells you is that corporate America is getting more without growing

06:45.505 --> 06:48.007
their labour force in terms of revenues.

06:48.007 --> 06:52.211
That's one way of the downside to the productivity that we're

06:52.211 --> 06:56.482
seeing does look like that employment growth is going to be much

06:56.482 --> 06:58.651
slower than we're used to.

06:58.651 --> 07:02.989
This is also part and parcel of the unique cycle that we've seen.

07:02.989 --> 07:06.292
I always talk about 2022 as the point at which we landed.

07:06.292 --> 07:10.396
It was either a hard soft landing or a very soft hard landing

07:10.396 --> 07:14.333
but certainly earnings growth contracted even if GDP didn't to the same

07:14.333 --> 07:18.471
extent. The problem with that as a recession is that it was a full

07:18.471 --> 07:21.574
employment recession, if I'm calling it a recession.

07:21.574 --> 07:25.578
So we're seeing a full employment recovery which is very

07:25.578 --> 07:29.816
different from recoveries that we've experienced in the past.

07:29.816 --> 07:32.618
That's the difference this cycle.

07:32.618 --> 07:36.656
That difference actually ports into productivity and better

07:36.656 --> 07:39.926
corporate profits which sustains the cycle.

07:39.926 --> 07:44.363
Does this fit with sort of a clearing event so that we are entering what,

07:44.363 --> 07:48.935
I mean, normalized gets thrown around as a term but there is something to

07:48.935 --> 07:52.872
entering a time where there's a slightly more normalized set of

07:52.872 --> 07:56.375
circumstances in the markets post-COVID.

07:56.375 --> 08:00.246
I think that's right. I mean, a lot of what I'm talking about as a recession or

08:00.246 --> 08:04.517
recovery is just a renormalization from COVID

08:04.517 --> 08:08.621
that ended up with a contraction in earnings growth and now,

08:08.621 --> 08:12.525
finally, for the first time median earnings are actually growing again.

08:12.525 --> 08:16.128
For the average company, or for the median company in the S&P, we've

08:16.128 --> 08:19.532
essentially been in an earnings recession for the better part of three years,

08:19.532 --> 08:23.636
which looks like recessions we've seen in COVID, in 2009,

08:23.636 --> 08:26.339
in 2001, in 1990.

08:26.339 --> 08:30.376
It was a recessionary event for the average company which was,

08:30.376 --> 08:34.514
to your point, much like a renormalization from what we

08:34.514 --> 08:38.451
saw during COVID which essentially ended an economic

08:38.451 --> 08:40.920
cycle as we knew it.

08:40.920 --> 08:43.990
It, in some ways, just dragged it out.

08:43.990 --> 08:46.425
That's sort of what we're dealing with right now.

08:46.425 --> 08:50.463
Our growth doesn't look particularly strong when

08:50.463 --> 08:54.600
you aggregate it together. You wouldn't say it's weak or recessionary but GDP

08:54.600 --> 08:58.104
growth, I mean, we can all look at the seasonally adjusted run rates of saying

08:58.104 --> 09:02.108
4% but on a year-on-year basis you're just above 2.

09:02.108 --> 09:07.079
We used to call that stall speed.

09:07.079 --> 09:10.216
Earnings growth on the other side is like 10 to 12%.

09:10.216 --> 09:14.153
It's not like you would be like that's a home run when you look historically.

09:14.153 --> 09:16.422
I mean, it's median levels.

09:16.422 --> 09:19.926
None of what we were seeing is really strong growth.

09:19.926 --> 09:24.196
As much as I've heard narratives around the administration

09:24.196 --> 09:28.367
wants to run it hot we are not seeing that translate

09:28.367 --> 09:30.236
in any way, shape or form.

09:30.236 --> 09:34.507
As an equity investor I would say statistically that's good thing because

09:34.507 --> 09:38.678
what you see is that grind it out mediocre, as the kids would call

09:38.678 --> 09:42.748
mid, earnings growth and GDP growth means that the cycle

09:42.748 --> 09:44.850
can actually be more durable.

09:44.850 --> 09:49.355
To your point, I think that that is that mid-level growth is

09:49.355 --> 09:53.926
just a very long renormalization from COVID.

09:53.926 --> 09:56.729
That's really interesting what you just talked about with sort of the cycle

09:56.729 --> 10:00.766
setting up. How long ultimately could this be?

10:00.766 --> 10:02.902
We're trying to figure out where we are in the cycle, everyone's asking this

10:02.902 --> 10:05.605
question right now, this portends what?

10:05.605 --> 10:07.840
We've got a ways to go?

10:07.840 --> 10:10.776
How many years? Do you want to put a year on it, a range?

10:10.776 --> 10:12.812
Sure, we can try, we can definitely try.

10:12.812 --> 10:15.982
When you look at the business cycles in the US the business in the cycles in US

10:15.982 --> 10:20.019
average 10 years. Now, that's sort of the last couple

10:20.019 --> 10:22.121
so you can certainly point to 4.

10:22.121 --> 10:25.424
But yeah, maybe you say the average is extending over time.

10:25.424 --> 10:28.928
Australia hasn't had a recession in, we used to say 18 years and that was, I

10:28.928 --> 10:32.198
feel like, a couple years ago so it's probably 20 years.

10:32.198 --> 10:35.334
It doesn't mean that 10 years has to be the end of the cycle.

10:35.334 --> 10:38.638
I mean, in some ways they were just correlated with events like the financial

10:38.638 --> 10:41.073
crisis and the dot-com bubble.

10:41.073 --> 10:44.844
Those were the crisis ending events not just time.

10:44.844 --> 10:48.180
If you wanted to put time on it and say, okay, the last two cycles were 10

10:48.180 --> 10:50.916
years so let's go with that as a theory.

10:50.916 --> 10:54.387
Let's call 2022 the cycle start.

10:54.387 --> 10:58.324
I called it a hard soft landing or a soft hard landing but let's

10:58.324 --> 11:03.362
call it a landing and say that the next recession will be in 2032,

11:03.362 --> 11:07.466
which is quite a ways off, which means we're not even

11:07.466 --> 11:11.437
maybe at mid-cycle yet, which means that you don't know what

11:11.437 --> 11:13.839
mid-cycle things are.

11:13.839 --> 11:18.010
That is kind of unbelievable thinking about the fact that we are so

11:18.010 --> 11:21.180
early in a cycle but it does, as you say, kind of add up here.

11:21.180 --> 11:25.785
I wanted to just layer on a piece of Fed politics right now because it is

11:25.785 --> 11:30.122
topical. The idea that there's pressure from the administration

11:30.122 --> 11:33.959
to cut rates but, in fact, all of these things that you're pointing to right

11:33.959 --> 11:37.897
now make the case for why a rate cut may be a

11:37.897 --> 11:42.401
very appropriate thing to be doing and not being behind

11:42.401 --> 11:46.605
the tape, ultimately, kind of being ahead of it and being led, maybe just

11:46.605 --> 11:50.810
layer on sort of that discrepancy like the administration wants

11:50.810 --> 11:57.316
rate cuts but the argument you're making is that a rate cut might be just fine.

11:57.316 --> 12:00.986
I think that when you think about administrations, this administration or back

12:00.986 --> 12:04.223
in history, you would say all of them want rate cuts.

12:04.223 --> 12:06.292
Some have been more vocal than others.

12:06.292 --> 12:09.361
I think the interesting part of history, and you've seen this play out over the

12:09.361 --> 12:12.865
last year, is that administrations don't always get what they want.

12:12.865 --> 12:15.401
You wouldn't want to bet on it as an investor.

12:15.401 --> 12:18.104
What you would want to bet on is the data.

12:18.104 --> 12:22.475
I think there is, you know, people have thrown out 1% interest rates, that

12:22.475 --> 12:26.579
would likely be a problematic situation for

12:26.579 --> 12:30.583
the economy, the Fed, and I think it would probably actually just steepen

12:30.583 --> 12:34.320
the yield curve and you would get 10-year Treasuries to actually rise not fall.

12:34.320 --> 12:38.457
Because you don't want to sit at zero or too close to it.

12:38.457 --> 12:41.293
Exactly. That would be running it hot.

12:41.293 --> 12:45.331
I think that saying that there's no room for additional rate cuts, I

12:45.331 --> 12:47.900
think there's room for disagreement there.

12:47.900 --> 12:51.036
It doesn't mean that the administration is forcing me to make that decision.

12:51.036 --> 12:55.141
The administration isn't forcing me into any particular situation with

12:55.141 --> 12:59.111
the data. Yet when I look at the data I come to the higher odds

12:59.111 --> 13:03.182
that yes, I think the Federal Reserve can continue to renormalize policy

13:03.182 --> 13:06.385
as inflation continues to decelerate.

13:06.385 --> 13:09.054
I think that there's a lot of data pointing in that direction.

13:09.054 --> 13:13.325
The magnitude can be debated but whether or not it's 25 or 50

13:13.325 --> 13:17.797
or maybe even 75 basis points, depending on how inflation decelerates,

13:17.797 --> 13:22.067
all of those situations again go into a renormalization of policy

13:22.067 --> 13:26.138
with real interest rates increasingly likely to slip

13:26.138 --> 13:30.109
into that bottom half, which then again reinforces earnings growth

13:30.109 --> 13:32.011
which makes the cycle durable.

13:32.011 --> 13:36.649
It all comes back to is inflation going to continue to either

13:36.649 --> 13:39.485
decelerate lower or just not accelerate.

13:39.485 --> 13:42.021
I think that there's some concern on the Fed.

13:42.021 --> 13:45.558
There was one concern that tariffs were going to increase the overall rate of

13:45.558 --> 13:48.894
inflation and we're seeing that that's not the case.

13:48.894 --> 13:52.031
There is another concern that, well, maybe growth is going to be so hot that

13:52.031 --> 13:54.500
that's actually going to lead to higher inflation.

13:54.500 --> 13:58.504
Perhaps as that concern gets assuaged through the course of the year

13:58.504 --> 14:02.474
with the productivity report that we just saw, again, that

14:02.474 --> 14:06.445
will allow them to understandably renormalize rates because they

14:06.445 --> 14:10.416
have real data at their fingertips that suggests that that is the right

14:10.416 --> 14:12.585
policy decision to make.

14:12.585 --> 14:15.788
Hello, investors. We'll be back to the show in just a moment.

14:15.788 --> 14:19.358
I wanted to share that here at Fidelity, we value your opinion.

14:19.358 --> 14:21.660
Please take a few minutes to help us shape the future of Fidelity Connects

14:21.660 --> 14:26.765
podcasts. Complete our listener survey by visiting fidelity.ca/survey,

14:26.765 --> 14:28.734
and you could win one of our branded tumblers.

14:28.734 --> 14:31.804
Periodic draws ending by March 30th, 2026.

14:31.804 --> 14:35.407
And don't forget to listen to Fidelity Connects, the Upside, and French

14:35.407 --> 14:39.445
DialoguesFidelity podcasts available on Apple, Spotify, YouTube, or wherever

14:39.445 --> 14:43.649
else you get your podcasts. Now back to today's show.

14:43.649 --> 14:48.787
Again, I'm just going back to sort of layer on the complications of

14:48.787 --> 14:52.825
what the Fed is dealing with, perhaps, well, the Fed is definitely

14:52.825 --> 14:54.693
dealing with complications, there's no question about that.

14:54.693 --> 14:58.697
It's not a perhaps situation but the idea of the economy being where it is

14:58.697 --> 15:02.668
and those feeling that it's an affordability absolute

15:02.668 --> 15:07.172
crisis for many people in the United States, the K-shape economy shows this,

15:07.172 --> 15:11.310
that is kind of out of line with many of the points of the cycle that

15:11.310 --> 15:15.481
you're pointing to of what a durable investment company's being able

15:15.481 --> 15:19.518
to make money in margins going forward seems

15:19.518 --> 15:23.055
to be the opposite. Again, we come back to sort of this K-shaped economy, where

15:23.055 --> 15:27.092
the economy feels it is and in many cases actually is.

15:27.092 --> 15:31.297
We have these rolling recessions in housing, in different areas

15:31.297 --> 15:34.767
of the overall economy and certainly small businesses and small banks and

15:34.767 --> 15:37.970
median companies have, in fact, lagged.

15:37.970 --> 15:41.373
We see this rolling recession. I think to your definition on the consumer end

15:41.373 --> 15:44.777
of it you perceive it as an affordability crisis which it is certainly in

15:44.777 --> 15:47.546
housing and in goods and services overall.

15:47.546 --> 15:50.916
The interesting way is when you look back in history how would you like to

15:50.916 --> 15:53.652
solve that? Do you want prices to fall?

15:53.652 --> 15:56.956
Yes, you'd like prices to fall but wages to stay sticky.

15:56.956 --> 16:01.126
That hasn't happened historically, meaning your best case scenario

16:01.126 --> 16:05.064
is this grind it out version that I'm talking about where

16:05.064 --> 16:09.168
real wage growth isn't top quartile levels but maybe it's in the top half of

16:09.168 --> 16:13.272
the distribution so you grow wages a little bit stronger than inflation

16:13.272 --> 16:16.675
for a very long period of time.

16:16.675 --> 16:20.980
Affordability crisis will not get solved in year one or year two

16:20.980 --> 16:24.984
because if it did get solved in year one or two that would likely be a

16:24.984 --> 16:29.121
recessionary event, declining prices, and if that's not what we

16:29.121 --> 16:33.425
want, we want a good affordability scenario, you're really looking at

16:33.425 --> 16:36.595
something that gets solved through the course of a decade.

16:36.595 --> 16:40.899
We experienced this specifically in New England, not for the overall economy,

16:40.899 --> 16:44.937
in the '90s. It was after there were many, many bank failures in New

16:44.937 --> 16:49.108
England, specifically in the S&L crisis in the '90s, that's why not only

16:49.108 --> 16:53.112
the jobless recovery was indicative certainly in the overall data

16:53.112 --> 16:56.181
but it was specifically true in New England.

16:56.181 --> 17:00.753
You had to grow into that affordability from a housing perspective

17:00.753 --> 17:03.322
for a very long period of time.

17:03.322 --> 17:07.192
It doesn't feel comfortable but it can be repeatable.

17:07.192 --> 17:11.196
Ironically, the key is that durability of the cycle allows

17:11.196 --> 17:13.832
for affordability to get better over time.

17:13.832 --> 17:17.970
As it relates to the equity market that's actually a better setup, not a

17:17.970 --> 17:22.141
worse setup, because it's the euphoria that creates the risk

17:22.141 --> 17:25.744
of boom problems for the equity market.

17:25.744 --> 17:29.715
If it's this slow grind it out level and you're growing

17:29.715 --> 17:33.685
into affordability there's no euphoria, there's no excesses and

17:33.685 --> 17:38.257
there's no excess to crash from, which again gets back to that's

17:38.257 --> 17:41.226
the underpinning of the secular bull market.

17:41.226 --> 17:45.998
But there still seems to be concerns that AI, I mean,

17:45.998 --> 17:49.301
you tell us but is a bubble in certain areas.

17:49.301 --> 17:54.173
Are you just saying that the underpinning essentially can handle that?

17:54.173 --> 17:58.010
I think that the underpinning can handle that but I do find the AI and the

17:58.010 --> 18:01.814
bubble discussion and narrative really, really interesting.

18:01.814 --> 18:06.185
We talked before about how you're just not seeing CapEx either in technology

18:06.218 --> 18:10.222
or the overall S&P 500 look anything like what we

18:10.222 --> 18:14.193
saw in bubbles before. We can debate what the ROI is going to be with this

18:14.193 --> 18:18.230
technology but I think you cannot debate that the ROI has been

18:18.230 --> 18:19.998
strong to date.

18:19.998 --> 18:24.269
When you look at technology stocks in terms of increasing operating margins

18:24.269 --> 18:28.407
you are still seeing sustainable increases in operating margins despite the

18:28.407 --> 18:32.611
fact that CapEx has ticked up. Because of that really strong free cash

18:32.611 --> 18:34.279
load they have it to spend.

18:34.279 --> 18:38.350
I think that that's interesting data point number one as it relates to AI and

18:38.350 --> 18:41.920
bubbles but interesting data point number two as it relates to market

18:41.920 --> 18:45.657
concentration, and I think you have to think through the math of this, the

18:45.657 --> 18:49.094
market got more concentrated over the course of the last year.

18:49.094 --> 18:53.031
When we say that, hey, it's the Mag-7 lifting up the whole market,

18:53.031 --> 18:54.766
well, that's not true at all.

18:54.766 --> 18:59.371
Five of the seven of Mag-7 stocks underperformed the market.

18:59.371 --> 19:03.408
Back to that even if you're talking about a bubble you have to be really

19:03.408 --> 19:07.613
careful at which stocks you're talking about a bubble in because I

19:07.613 --> 19:10.816
have never seen a bubble historically where the bubble that you're taking about

19:10.816 --> 19:13.886
actually underperformed not outperformed.

19:13.886 --> 19:18.190
Not a lot is lining up for that to be a problematic

19:18.190 --> 19:19.424
situation.

19:19.424 --> 19:23.662
That is fascinating. Is unit labour costs and the

19:23.662 --> 19:27.733
slower growth that we've seen indicative of

19:27.733 --> 19:30.969
part of the return on investment?

19:30.969 --> 19:32.838
That's definitely correlated to that.

19:32.838 --> 19:36.308
To your point, yes, I think that that's the right way to sort of square the

19:36.308 --> 19:39.912
circle, as it were, which is to say that if we're looking at broad level

19:39.912 --> 19:43.815
profitability and we are concerned that CapEx is too high and therefore free

19:43.815 --> 19:47.619
cash flow margins are gonna be lower this is yet another data point that says,

19:47.619 --> 19:52.024
aha, but wait, this is actually more productive than you think.

19:52.024 --> 19:56.061
That gets to the are you sure that costs aren't going to decelerate

19:56.061 --> 19:59.164
for data centres or AI or anything else?

19:59.164 --> 20:02.267
Are you're sure they're not going to get more free cash flow than you think out

20:02.267 --> 20:06.505
of it, which might mean that again, if labour costs are low maybe free

20:06.505 --> 20:10.409
cash flow margins can be higher than you think for technology and the broader

20:10.409 --> 20:11.109
market.

20:11.109 --> 20:15.747
We've just started earnings and taking a look mostly at the bank earnings of

20:15.747 --> 20:18.650
interest. Is there anything there that has pointed one way or the other to some

20:18.650 --> 20:22.955
of the data points that you're looking at that are broadly economic

20:22.955 --> 20:26.158
data points? Are there any sort of comments that you've picked up on one way or

20:26.158 --> 20:28.727
the other that are useful?

20:28.727 --> 20:32.731
Not so far. I will say that banks are always early in

20:32.731 --> 20:36.401
terms of their reporting, I find it all very idiosyncratic in the beginning and

20:36.401 --> 20:39.871
you have to look at it cohesively after the reporting structure.

20:39.871 --> 20:43.909
You do have to sort of wait to put together the themes but I think

20:43.909 --> 20:46.845
that the interesting part, and we've seen a lot of negative headlines in the

20:46.845 --> 20:51.383
beginning, certainly the 10% cap potentially on credit cards and

20:51.383 --> 20:55.821
with certain companies reporting, creating downside in earnings, we'll

20:55.821 --> 20:59.992
see how it all works out, but it will be interesting to see how the

20:59.992 --> 21:03.962
broader financial universe reacts because from my perspective it's

21:03.962 --> 21:08.967
not really about the earnings, it's about how strong valuation support

21:08.967 --> 21:13.038
is statistically which again, you could end up in the situation

21:13.038 --> 21:16.975
... remember, we're at bottom decile relative forward P/E as

21:16.975 --> 21:19.278
we started the year in terms of financials overall.

21:19.278 --> 21:22.180
This is true for banks too but for financials overall.

21:22.180 --> 21:25.884
Well, if you look back through history even over any five-year increment since

21:25.884 --> 21:30.389
the financial crisis what are your odds of outperformance that year, 70.

21:30.389 --> 21:34.059
What are your average outperformance, usually about 500 basis points, which is

21:34.059 --> 21:37.663
very significant for my rolling odds at the sector level.

21:37.663 --> 21:40.365
So you say, okay, well what does this tell you?

21:40.365 --> 21:44.336
That tells you that whatever you're worried about, whatever this

21:44.336 --> 21:48.407
administration might do, whatever the yield curve might do, whatever

21:48.407 --> 21:52.411
inflation might do, might be increasingly priced in.

21:52.411 --> 21:56.214
Did we see good news to start the kickoff in terms of bank earnings?

21:56.214 --> 22:00.585
Not so far but it will show you in terms of valuation support

22:00.585 --> 22:02.788
as we progress through earnings.

22:02.788 --> 22:06.792
As you say, it's been very idiosyncratic thus far in even just

22:06.792 --> 22:09.728
the bank earnings themselves.

22:09.728 --> 22:13.565
When you take a look at the sectors, let's go through what is top, bottom.

22:13.565 --> 22:16.435
We have seen some leadership transition.

22:16.435 --> 22:20.439
As you've always said it's not that tech is suddenly not going to be leadership

22:20.439 --> 22:24.609
but within the lower downs there has been some change-ups

22:24.609 --> 22:29.881
there. What are you looking for in terms of top three, bottom three sectors?

22:29.881 --> 22:33.218
I do want to be clear. There's a lot of talk about rotation and I think we've

22:33.218 --> 22:35.854
got to be really careful with that word.

22:35.854 --> 22:39.791
When we look at 2025, last year, it was only

22:39.791 --> 22:43.662
tech and communication services, which I call tech-like , that outperformed.

22:43.662 --> 22:46.064
Everything else kind of underperformed. That's rare historically.

22:46.064 --> 22:48.767
Usually you get more sectors outperforming.

22:48.767 --> 22:52.771
On average five sectors outperform but you get the bulk of the performance from

22:52.771 --> 22:55.574
two or three. We did not see that.

22:55.574 --> 23:00.345
I don't expect rotation so much as I expect broadening

23:00.345 --> 23:04.616
where tech and tech-like sectors aren't the only

23:04.616 --> 23:06.685
places that outperform.

23:06.685 --> 23:10.956
That does not mean that you should sell your technology.

23:10.956 --> 23:14.593
I want to make that clear because I see strategists a lot of times say, oh,

23:14.593 --> 23:17.062
we're rotating away from tech to other things.

23:17.062 --> 23:21.433
We are rotating continually away from defence, two

23:21.433 --> 23:25.537
other areas that I think are economically sensitive, or that's what I

23:25.537 --> 23:27.839
see as the highest risk-rewards.

23:27.839 --> 23:32.210
Depending on your penchant for volatility I think financials

23:32.210 --> 23:36.348
look very, very interesting. I also think rate sensitives like homebuilders

23:36.348 --> 23:38.617
look very, very interesting here.

23:38.617 --> 23:43.422
I also think technology is an outperformer in 2026

23:43.422 --> 23:45.056
given the durability of earnings.

23:45.056 --> 23:48.760
My top three sectors, I'm not sure how I'd rank them, to be honest, because it

23:48.760 --> 23:50.562
depends on the sub-sectors.

23:50.562 --> 23:54.766
Let's say financials where capital markets and brokers look the most

23:54.766 --> 23:58.837
interesting to me. Then technology where I will say that semiconductors still

23:58.837 --> 24:02.808
look the most interesting to me. Then consumer discretionary where I would say

24:02.808 --> 24:05.410
homebuilders look the most interesting to me.

24:05.410 --> 24:09.114
On the bottom three I would still put defence.

24:09.114 --> 24:12.751
I would put consumer staples that is fundamentally challenged and looks like a

24:12.751 --> 24:16.688
value trap. I would still put utilities which actually did pretty well

24:16.688 --> 24:20.659
last year but still underperformed but I would still say is too expensive

24:20.659 --> 24:24.463
relative to the returns that they produce and is too defensive historically and

24:24.463 --> 24:27.165
in my mind not really a good AI play.

24:27.165 --> 24:29.701
If you want to play AI there are better ways to play AI.

24:29.701 --> 24:34.506
That's interesting because a lot of people want to apply AI through utilities.

24:34.506 --> 24:38.577
You can play it in the power name specifically but that's not going to generate

24:38.577 --> 24:41.880
the return you want if you're buying the overall index.

24:41.880 --> 24:45.984
That's down into stock picking, and if you want stock picking there's

24:45.984 --> 24:49.821
probably better people to talk to, but if you want sector allocation that's

24:49.821 --> 24:52.257
sort of where I come in from a probability perspective.

24:52.257 --> 24:56.328
I don't think it's going to drift up to the overall sector of utilities.

24:56.328 --> 25:00.332
It made it the best defensive sector last year but that doesn't make it

25:00.332 --> 25:03.068
an outperformer where I want to put more capital.

25:03.068 --> 25:07.072
So consumer staples, utilities and then I would still be energy

25:07.072 --> 25:10.709
on the bottom three. Health care got upgraded a couple clicks.

25:10.709 --> 25:14.312
I tell portfolio managers I don't think I want you to sell your technology for

25:14.312 --> 25:18.550
health care but I do want you to think about selling your energy for

25:18.550 --> 25:22.521
health care. Energy still looks, regardless of the

25:22.521 --> 25:25.390
geopolitical premium, regardless of the supply and demand dynamics which I'm

25:25.390 --> 25:29.628
happy to talk about in the Q&A, it still looks too profitable to

25:29.628 --> 25:33.798
bet on. When you're in the top half of the distribution on operating margins or

25:33.798 --> 25:38.336
returns that just means that there's more downside than you think.

25:38.336 --> 25:42.040
When there's more downside than you think in the energy sector there has been

25:42.040 --> 25:46.211
not just downside on fundamentals, which means that earnings growth is lower,

25:46.211 --> 25:50.015
it could be lower than you think, but there's downside on multiples too.

25:50.015 --> 25:53.218
You're not paid to be early on energy.

25:53.218 --> 25:57.289
That's what concerns me. I think that there is still excess

25:57.289 --> 26:01.526
supply, as we speak, in oil which creates downside

26:01.526 --> 26:07.232
pressure on oil prices, which creates downside pressure on energy stocks.

26:07.232 --> 26:10.468
So in the meantime don't be early according to the data that you're looking at

26:10.468 --> 26:12.637
and what you're analyzing.

26:12.637 --> 26:16.241
A couple of thoughts on the Fed.

26:16.241 --> 26:20.445
You wonder if Jay Powell's gonna be all right there.

26:20.445 --> 26:21.246
Right, we don't know.

26:21.246 --> 26:22.981
What do we take from that?

26:22.981 --> 26:26.985
The markets are not happy about that but at the same time try

26:26.985 --> 26:31.189
to roll with it. I'm just sort of curious.

26:31.189 --> 26:35.260
The narrative is not happy but if you said, well, let's use a litmus test

26:35.260 --> 26:38.763
as an indicator for are we worried about Fed independence or are we not you

26:38.763 --> 26:43.034
would use the long bond. We didn't see a whole lot of problematic

26:43.068 --> 26:47.906
rise in the long end as it related to the announcements.

26:47.906 --> 26:51.910
We'll see how this plays out but at the end of the day, again, getting

26:51.910 --> 26:56.314
back to most administrations don't get what they want.

26:56.314 --> 27:00.185
It's clear that this administration hasn't achieved everything it wanted.

27:00.185 --> 27:04.456
I mean, tariffs are a great example. The sort of opening salvo was 30%

27:04.456 --> 27:08.627
and we're somewhere around 10 and that might be

27:08.627 --> 27:12.097
overturned by the Supreme Court so we'll see where we end up.

27:12.097 --> 27:14.633
Administrations don't get what they want.

27:14.633 --> 27:18.069
At the end of the day the Fed is a committee.

27:18.069 --> 27:22.173
The chair can corral the cats but they don't make the

27:22.173 --> 27:26.444
decisions at the end of the day. To me debate leads to better investment

27:26.444 --> 27:30.749
conclusions over time and I think debate would lead to better monetary policy

27:30.749 --> 27:35.020
over time. The fact that you are starting to see dissents

27:35.020 --> 27:38.556
to me does not mean that the Fed is not independent or it's divisive or this is

27:38.556 --> 27:42.927
problematic. That means that it is not clear what monetary

27:42.927 --> 27:44.729
policy should be doing.

27:44.729 --> 27:49.367
When it's not clear you want all the voices heard.

27:49.367 --> 27:53.405
Back to what this means for Chair Powell and the Fed, I'm not

27:53.405 --> 27:57.876
necessarily certain that any of these arguments and raising of the voices is

27:57.876 --> 28:02.280
a bad thing for monetary policy as we look as investors.

28:02.280 --> 28:04.549
Fantastic. We look to you as a guiding light.

28:04.549 --> 28:07.018
Thank you so much, Denise Chisholm, for joining us here today.

28:07.018 --> 28:09.888
And if you do get the snow, happy digging.

28:09.888 --> 28:12.057
Thank you very much. Great to be back.

28:12.057 --> 28:15.994
Thanks for watching or listening to the Fidelity Connects

28:15.994 --> 28:20.131
podcast. Now if you haven't done so already, please subscribe to Fidelity

28:20.131 --> 28:22.934
Connects on your podcast platform of choice.

28:22.934 --> 28:25.770
And if you like what you're hearing, please leave a review or a five-star

28:25.770 --> 28:29.741
rating. Fidelity Mutual Funds and ETFs are available by working with

28:29.741 --> 28:33.111
a financial advisor or through an online brokerage account.

28:33.111 --> 28:36.815
Visit fidelity.ca/howtobuy for more information.

28:36.815 --> 28:40.652
While on Fidelity.ca, you can also find more information on future live

28:40.652 --> 28:44.789
webcasts. And don't forget to follow Fidelity Canada on YouTube, LinkedIn,

28:44.789 --> 28:46.791
and Instagram.

28:46.791 --> 28:49.661
We'll end today's show with a short disclaimer.

28:49.661 --> 28:53.498
The views and opinions expressed on this podcast are those of the participants,

28:53.498 --> 28:57.435
and do not necessarily reflect those of Fidelity Investments Canada ULC or

28:57.435 --> 29:01.439
its affiliates. This podcast is for informational purposes only, and should not

29:01.439 --> 29:03.975
be construed as investment, tax, or legal advice.

29:03.975 --> 29:06.277
It is not an offer to sell or buy.

29:06.277 --> 29:10.615
Or an endorsement, recommendation, or sponsorship of any entity or securities

29:10.615 --> 29:15.420
cited. Read a fund's prospectus before investing, funds are not guaranteed.

29:15.420 --> 29:18.990
Their values change frequently, and past performance may not be repeated.

29:18.990 --> 29:22.827
Fees, expenses, and commissions are all associated with fund investments.

29:22.827 --> 29:25.130
Thanks again. We'll see you next time.