What the market is already discounting: Insights from Denise Chisholm - May 7, 2026
Despite ongoing economic and geopolitical concerns, markets have continued to push higher. Fidelity’s Director of Quantitative Market Strategy, Denise Chisholm, shared that disconnect may feel uncomfortable, but it is not unusual. She believes markets may have already priced in more risk than many investors realize and shared insights on what the data says about earnings and inflation.
Here are some of the key points from her commentary.
Why markets can rise amid negative headlinest
Equity markets are forward looking. Stocks tend to price in bad news well before it shows up clearly in the economic data. What stands out in this cycle is not where markets are trading, but how persistent fear has been since COVID. Volatility has repeatedly spiked on negative headlines, yet credit markets have remained relatively calm. Historically, this kind of gap between equity fear and credit stress has often coincided with markets climbing higher, not lower.
A rare valuation signal
The market pullback earlier this year was short, but notable. Denise pointed out that it was driven largely by valuation, with stock market multiples compressing by roughly 15% to 20%. Moves of that size are historically uncommon. Once they occur, markets have often already done much of the work of discounting risk. Looking ahead one year, Denise cited historical data showing markets have gone on to rise most of the time, even in cases where earnings eventually declined. Her takeaway was not that risks are gone, but that the balance of risk and reward often shifts once this kind of valuation reset is already behind us.
Earnings: two data points she is watching closely
Two factors she believes could support corporate profitability are unit labour costs and median earnings. Unit labour costs are decelerating. Despite a low unemployment rate, wage growth has continued to slow and productivity has increased. In her data, unit labour costs sit in the lower range of historical outcomes, which has typically been supportive of future margins. Median earnings for the typical S&P 500 company have just emerged from a contraction that lasted close to three years. Denise noted that in past cycles, long earnings contractions have often been followed by more durable recoveries, suggesting profitability may prove more resilient than expected.
The U.S. consumer remains steady, not strong
The U.S. consumer as experiencing a modest recovery. Real growth is not recessionary, but it is also not robust. She emphasized that offsets matter. Higher energy prices do act as a tax on consumers, but some of that pressure has been balanced by factors such as tariff roll offs, tax refunds and changes in withholding. Together, those forces help explain why consumer spending has held up, even without strong income growth. From an investment perspective, Denise noted that jobs are a lagging indicator. Corporate profits tend to lead hiring decisions, which is why she continues to watch profitability trends closely.
Inflation: uncomfortable, but not necessarily a market problem
While inflation remains a concern for households, Denise framed the issue differently for equity investors. Historically, the biggest risk to stocks has been inflation that is both high and rising. Denise identified that danger zone at roughly 4.5% and above. By contrast, inflation in the 2.5% to 4% range has often been associated with stronger equity market outcomes. She also cautioned against assuming a straight line from higher input costs, such as oil, to sustained inflation. In her view, consumer tolerance ultimately determines whether companies can pass costs through. History shows that even large oil price shocks have not consistently led to accelerating core inflation.
Denise’s sector views
Top sectors
- Technology: Denise continues to see technology as a sector with attractive risk and reward. While concerns around capital spending and cash flow persist, she noted that parts of the sector are highly profitable yet priced at relatively low valuations, indicating potential for growth if negative expectations are factored into the market.
- Industrials: After nearly three years of weakness, manufacturing indicators are beginning to turn. Denise highlighted improvements in new orders and said the data supports a potential shift toward more cyclical areas such as machinery and transportation.
- Housing within consumer discretionary: Housing activity remains weak, but Denise believes much of the bad news is already priced in. With homebuilder valuations near historically low levels, she sees potential for growth if conditions stabilize or improve.
Conclusion: The bottom line
Denise closed with two simple messages. Oil price shocks may be more absorbable than investors expect. The market may have factored in some risk, but it's important to consider that headlines can sometimes exaggerate potential risks.
