Market leadership is broadening: Insights from Denise Chisholm - February 19, 2026

00:06.706 --> 00:08.608

Hello, and welcome to Fidelity Connects.

 

00:08.608 --> 00:12.712

I'm Pamela Ritchie. A slew of data has been released today and

 

00:12.712 --> 00:16.716

markets over the last several days have been shifting into what appears to

 

00:16.716 --> 00:20.754

be a new phase, one where leadership is broadening and long

 

00:20.754 --> 00:23.590

held assumptions are being reexamined.

 

00:23.590 --> 00:27.961

We are seeing tech valuations reset, industrials regain momentum

 

00:27.961 --> 00:32.065

and more segments of the market begin to pull their weight.

 

00:32.065 --> 00:36.336

At the same time disinflation is giving companies the confidence to plan,

 

00:36.336 --> 00:40.774

invest and expand beyond just a handful of mega-caps.

 

00:40.774 --> 00:43.643

Is this the foundation of a longer, more durable cycle?

 

00:43.643 --> 00:47.714

What might it all mean for investors navigating tech,

 

00:47.714 --> 00:50.383

the CapEx story and market breadth?

 

00:50.383 --> 00:54.521

Joining us here today for her weekly sector thesis is

 

00:54.521 --> 00:58.258

Fidelity Director of Quantitative Market Strategy, Denise Chisholm.

 

00:58.258 --> 01:01.461

A warm welcome to you, Denise. How are you today?

 

01:01.461 --> 01:05.231

Thank you. I'm good. It is sunny in Boston so everybody's happy here.

 

01:05.231 --> 01:08.134

Lovely. It's so nice to have that mid-winter, for sure.

 

01:08.134 --> 01:11.371

I'll just remind everyone to send questions in over the next half hour or so

 

01:11.371 --> 01:15.408

for Denise. This broadcast also has live French audio interpretation

 

01:15.408 --> 01:19.079

so do join us in either official language.

 

01:19.079 --> 01:22.282

I'd like to begin, if you don't mind, we'll go through all the data that's come

 

01:22.282 --> 01:26.453

out over the last several hours but you've mentioned in a recent report that

 

01:26.453 --> 01:32.992

inflation is an intensely, or inherently I think you said, personal

 

01:32.992 --> 01:36.329

,,, what is it? It's a data, a statistic that is personal.

 

01:36.329 --> 01:39.566

I guess that's right.

 

01:39.566 --> 01:42.869

Experience. It is one of the most personal statistics that we have that the

 

01:42.869 --> 01:46.873

government releases. I's partly because inflation, much like

 

01:46.873 --> 01:50.844

tariffs that we've talked about, always and everywhere feels like a tax.

 

01:50.844 --> 01:54.814

If the prices that you are paying are going up then that means

 

01:54.814 --> 01:58.151

you have, as a consumer, less purchasing power.

 

01:58.151 --> 02:00.753

That's step one that makes it very personal.

 

02:00.753 --> 02:04.124

The other part is the measurement issues around it.

 

02:04.124 --> 02:08.094

What is in my basket in terms of what I purchase might be very different

 

02:08.094 --> 02:10.096

from what's in your basket.

 

02:10.096 --> 02:14.601

It never feels quite right when a national average statistics comes

 

02:14.601 --> 02:17.737

out as it reflects how you feel.

 

02:17.737 --> 02:20.607

Maybe some people pay more money in terms of commuting to work.

 

02:20.607 --> 02:23.109

Maybe some people pay more in terms of health care insurance.

 

02:23.109 --> 02:27.313

Maybe some people have kids and pay more in terms of educational expenses.

 

02:27.313 --> 02:29.182

So it never feels quite right.

 

02:29.182 --> 02:33.386

Then you have a layer of a third option which a lot of what the

 

02:33.386 --> 02:37.357

market focuses on is core inflation, meaning they strip out food

 

02:37.357 --> 02:41.027

and energy. Most of the questions that I get from clients are, well, wait a

 

02:41.027 --> 02:45.064

minute, I actually have to buy food and I drive to work so

 

02:45.064 --> 02:48.334

I have to buy gasoline, why would that not be included?

 

02:48.334 --> 02:51.905

I think that that's a complicated personal view as well.

 

02:51.905 --> 02:56.276

Really, the monetary policy impetus, why they look at inflation,

 

02:56.276 --> 03:00.413

is very different from how you and I think about the statistic overall

 

03:00.413 --> 03:03.550

because it's how the Fed can influence inflation.

 

03:03.550 --> 03:06.452

It can't really always influence food inflation, it can't really always

 

03:06.452 --> 03:10.390

influence energy inflation because of supply-driven dynamics, so it

 

03:10.390 --> 03:12.959

focuses on what it can include.

 

03:12.959 --> 03:16.930

At the end of the day from a statistical perspective the best you can hope

 

03:16.930 --> 03:21.034

for is never to fully reflect somebody's personal experience

 

03:21.034 --> 03:25.004

with what they interact the economy in terms of prices, but it is

 

03:25.004 --> 03:28.942

to say that the measurement is consistent over and over again

 

03:28.942 --> 03:30.677

so we can look at a trend.

 

03:30.677 --> 03:34.547

I think that gets back to a lot of the data being released over the last couple

 

03:34.547 --> 03:38.618

months which is to stay that despite the fact that many prices went

 

03:38.618 --> 03:42.922

up during tariffs  much of what we are seeing from a trend perspective

 

03:42.922 --> 03:46.192

is disinflation continuing.

 

03:46.192 --> 03:50.163

It's very interesting. We'll bring in the spending that's going on in the

 

03:50.163 --> 03:53.967

economy as well, the CapEx story as we mentioned and so on, but the

 

03:53.967 --> 03:57.403

disinflation that's going on is coming from very high heights.

 

03:57.403 --> 04:01.441

We know this story from post-pandemic to soak

 

04:01.441 --> 04:05.612

up a lot of the money that was pushed out there via governments and so on,

 

04:05.612 --> 04:09.549

we're sort of dropping from heights and that's the disinflation, but the growth

 

04:09.549 --> 04:13.686

story seems very much intact from a lot of the different areas

 

04:13.686 --> 04:17.790

that we're looking at this. I guess there's a little bit

 

04:17.790 --> 04:20.927

of cognitive dissonance there. I wonder if you can take us through that, the

 

04:20.927 --> 04:24.597

disinflation plus growth.

 

04:24.597 --> 04:27.600

There's two things. One, I would say most growth statistically when you look

 

04:27.600 --> 04:31.604

back to 1962 is disinflationary, meaning if you had to bet on,

 

04:31.604 --> 04:35.942

let's just talk about industrial production or ISM recovering or even real

 

04:35.942 --> 04:39.279

consumption growth accelerating, and you said, well, what usually happens to

 

04:39.279 --> 04:42.815

inflation, what usually happens to inflation is that it continues to

 

04:42.815 --> 04:46.953

decelerate. I do think that there is still this knee-jerk reaction of any

 

04:46.953 --> 04:50.923

growth is inflationary that's statistically not viable, which

 

04:50.923 --> 04:54.394

highlights the issue we've been talking about for quite some time which is

 

04:54.394 --> 04:57.463

inflation is much harder to get than people think.

 

04:57.463 --> 04:59.699

You don't just get it from growth.

 

04:59.699 --> 05:03.970

You usually get it from specific fiscal stimulus, and not

 

05:03.970 --> 05:08.107

all fiscal stimulus, we didn't see any inflation in the financial crisis when

 

05:08.107 --> 05:11.911

they spent $787 billion in the stimulus package.

 

05:11.911 --> 05:14.047

Not all stimulus is equal.

 

05:14.047 --> 05:18.017

What we saw during Covid, 15% of stimulus on top of

 

05:18.017 --> 05:20.920

the economy, that was big enough.

 

05:20.920 --> 05:25.058

I think that there's still this fear that any kind of growth or stimulus or

 

05:25.058 --> 05:28.361

cheques written by the government or rebates is going to lead to the same

 

05:28.361 --> 05:32.532

conclusion and ex that period where it was very large relative

 

05:32.532 --> 05:36.235

to any other experience that's just usually not the case.

 

05:36.235 --> 05:39.439

In some ways, again, going back to your base case, I'm looking for patterns in

 

05:39.439 --> 05:43.576

history, what shouldn't you bet on in terms of if there is a reacceleration and

 

05:43.576 --> 05:47.714

growth, I'd say you should bet on the disinflationary trend that we're

 

05:47.714 --> 05:48.815

seeing continue.

 

05:48.815 --> 05:52.952

I think that there's a second part as well, which is to say the growth story is

 

05:52.952 --> 05:57.256

intact, sort of. The growth story has been bifurcated.

 

05:57.256 --> 06:01.361

This entire cycle has been off cycle and driven by not a

 

06:01.361 --> 06:03.129

whole lot of areas in the economy.

 

06:03.129 --> 06:04.997

There hasn't been a broadening in terms of economic growth.

 

06:04.997 --> 06:09.502

You've had pockets of strength like CapEx and some parts of manufacturing

 

06:09.502 --> 06:13.172

and then you've had deep pockets of weakness, the rest of manufacturing, small

 

06:13.172 --> 06:17.343

businesses, housing. You average the two together and you get average

 

06:17.343 --> 06:21.614

growth, 2% year-on-year in GDP growth, which is mediocre at

 

06:21.614 --> 06:22.482

best.

 

06:22.482 --> 06:26.018

We haven't really seen a substantial amount of growth.

 

06:26.018 --> 06:29.055

In fact, manufacturing, industrial production, all the numbers that just came

 

06:29.055 --> 06:33.159

out, are really emerging only now for the first time

 

06:33.159 --> 06:36.896

after a three year, I won't call it a recession anymore, but at least a

 

06:36.896 --> 06:40.833

malaise, which is you haven't seen growth for a

 

06:40.833 --> 06:44.670

sustained period of time. That is very, very atypical in US history.

 

06:44.670 --> 06:48.608

Usually you see big drawdowns and big ramps back up in terms

 

06:48.608 --> 06:51.944

of recovery and we've just sort of been in this no man's land.

 

06:51.944 --> 06:53.913

Now we are finally emerging from that.

 

06:53.913 --> 06:57.583

I think that that emergence is likely sticky when you look at it and it's

 

06:57.583 --> 07:00.286

usually coupled with continued disinflation.

 

07:00.286 --> 07:02.422

That's so, so fascinating.

 

07:02.422 --> 07:05.191

Some of the numbers are out, there's a jobless number which we'll get to, but

 

07:05.191 --> 07:09.228

the trade deficit, we saw that, this is from the

 

07:09.228 --> 07:12.932

US perspective. From the Canadian perspective there's another story there.

 

07:12.932 --> 07:17.069

Wholesale inventory numbers kind of flat, I mean, up a little bit, retail

 

07:17.069 --> 07:21.207

inventories flat. That's interesting because it takes us into the

 

07:21.207 --> 07:24.877

tariff discussion there, or at least those looking for a tariff story certainly

 

07:24.877 --> 07:28.948

would look to whether retailers are able

 

07:28.948 --> 07:31.951

to sell what they're trying to sell, if they're stuck with inventories.

 

07:31.951 --> 07:34.253

Take us in there from the numbers that we got today.

 

07:34.253 --> 07:39.091

What does that tell you thus far, probably along with the trade deficit.

 

07:39.091 --> 07:43.129

Thus far what we are seeing is the angst or the pain from tariffs

 

07:43.129 --> 07:47.099

is much more, I'd say, diffuse and spread out then I think a lot

 

07:47.099 --> 07:50.703

of the research maybe implies. I think a lot of research that people have been

 

07:50.703 --> 07:54.841

looking at follows price and it is definitely true that every importer,

 

07:54.841 --> 07:58.845

or I would say exporter into the US, and then every US company wants

 

07:58.845 --> 08:01.147

to pass on price all the way down the line.

 

08:01.147 --> 08:05.151

That's going to be the first sort of knee-jerk reaction, okay, if my

 

08:05.151 --> 08:08.488

costs went up I'm just going to try and pass it through to everyone.

 

08:08.488 --> 08:12.458

It's up to the consumer to be like, no, you're not going to pass that

 

08:12.458 --> 08:15.895

through to me because I'm not going to buy the washing machine that's 15% more.

 

08:15.895 --> 08:18.598

Now, I'm worse off because I didn't get to buy the new washing machine, I have

 

08:18.598 --> 08:22.635

to fix my old washing machine, but the US producer, to

 

08:22.635 --> 08:26.739

your point retail, is also going to be worse off down the line

 

08:26.739 --> 08:29.442

because quantity demand went down.

 

08:29.442 --> 08:33.479

If quantity demand goes down enough and it doesn't offset sort of the price

 

08:33.479 --> 08:36.415

increases that they're getting from the people who do need to buy washing

 

08:36.415 --> 08:38.084

machines, then even margins go down.

 

08:38.084 --> 08:42.355

They bear some of the consequence and that goes all the way back.

 

08:42.355 --> 08:46.492

This is a very complicated math to say that we can argue for

 

08:46.492 --> 08:50.429

the next, literally, years over who bore the cost of tariffs is

 

08:50.429 --> 08:54.467

probably everyone. We can take some guesses, there are

 

08:54.467 --> 08:58.571

guesses that maybe it's 40 to 60% on the US consumer and then the rest spread

 

08:58.571 --> 09:02.542

out to the US producer and importers but it's definitely not all the US

 

09:02.542 --> 09:06.512

consumer because the US customer has basically said no to the

 

09:06.512 --> 09:09.949

price increases that had been attempted to pass through.

 

09:09.949 --> 09:14.253

You know this empirically  because inflation didn't spike.

 

09:14.253 --> 09:18.190

They are obviously not willing to put up with the pass through pricing.

 

09:18.190 --> 09:22.194

I think that gets back to the tariffs are

 

09:22.194 --> 09:26.799

a tax and ultimately will not lead to sustained inflation.

 

09:26.799 --> 09:29.869

There are still Supreme Court decisions to come out.

 

09:29.869 --> 09:32.371

We don't know when that's going to come out, might actually be today but we

 

09:32.371 --> 09:33.873

don't really know.

 

09:33.873 --> 09:36.008

Maybe tomorrow.

 

09:36.008 --> 09:39.512

Maybe tomorrow. The discussion there is ... I guess I'll just ask you point

 

09:39.512 --> 09:41.847

blank, did the administration have to do this?

 

09:41.847 --> 09:45.818

There was a lot of money that was given out during the pandemic and

 

09:45.818 --> 09:49.822

every country around the world is dealing with some version of the debt issue

 

09:49.822 --> 09:52.158

out of that. There's no question.

 

09:52.158 --> 09:54.894

The administration of the US came in saying they were absolutely going to

 

09:54.894 --> 09:56.762

tackle it. This is how they chose to tackle it.

 

09:56.762 --> 10:00.800

It's just kind of interesting, does it need to go on or have they taken

 

10:00.800 --> 10:04.870

a big bite out of it from, essentially, a tax on

 

10:04.870 --> 10:07.974

consumers, on everyone.

 

10:07.974 --> 10:12.044

It's essentially a consumption tax which economists will tell you is the most

 

10:12.044 --> 10:14.847

efficient tax in the sense that you get to choose whether or not you pay.

 

10:14.847 --> 10:18.951

It is deeply regressive, and I think that that's one of the problems with

 

10:18.951 --> 10:22.888

that, but it is the efficient tax in terms of you choosing whether or not you

 

10:22.888 --> 10:25.958

pay. That's how the US consumer can say, no, I'm not going to buy the washing

 

10:25.958 --> 10:29.161

machine so I'm not, quote, taxed, although I'm worse off.

 

10:29.161 --> 10:31.130

I think the interesting part about tariffs ...

 

10:31.130 --> 10:33.366

you asked did they have to do it?

 

10:33.366 --> 10:37.370

I will say from a US citizen perspective  you'd like to think that

 

10:37.370 --> 10:41.407

if you built up debt you have some plan to then roll down that

 

10:41.407 --> 10:45.344

debt. From an investment perspective I think that

 

10:45.344 --> 10:47.213

that's more interesting.

 

10:47.213 --> 10:51.217

If you told me, Denise, hey, tariffs were going to go away because the

 

10:51.217 --> 10:55.287

Supreme Court was going to say, okay, no, you can't do this anymore, and the

 

10:55.287 --> 10:58.491

administration said, well, affordability is an issue, maybe we'll roll back

 

10:58.491 --> 11:02.528

half or 75% of the tariffs and just let it go, did they have to do

 

11:02.528 --> 11:04.196

it for fiscal discipline?

 

11:04.196 --> 11:06.198

I'm not so sure.

 

11:06.198 --> 11:09.835

What I see in the data is that there's been no statistical relationship

 

11:09.835 --> 11:12.872

historically between the level of deficit and the level of interest rates,

 

11:12.872 --> 11:16.842

meaning if you are afraid as a US investor like, okay,

 

11:16.842 --> 11:20.713

if we can't repay this and we don't have any taxes coming in and the deficit is

 

11:20.713 --> 11:24.817

now even bigger shouldn't that mean that foreign investors are going to sell

 

11:24.817 --> 11:28.754

US Treasuries and that we are going to lead to a spike in yields

 

11:28.754 --> 11:30.923

after the bond vigilantes?

 

11:30.923 --> 11:34.360

You don't see any of it in the date historically in terms of it being a link.

 

11:34.360 --> 11:37.329

The other thing that I'll say is when you look at official selling of US

 

11:37.329 --> 11:40.733

Treasuries, meaning other central banks, you see some selling but there's more

 

11:40.733 --> 11:44.070

net buying by other foreign investors that are actually individuals.

 

11:44.070 --> 11:48.174

If you look at the overall tick purchases of US Treasuries they're going up the

 

11:48.174 --> 11:52.378

entire time, not down, which shows you that nothing is right now different

 

11:52.378 --> 11:56.348

yet. That sort of leads to the same conclusion,

 

11:56.348 --> 12:01.454

which is wait a minute, everybody kind of did the same thing at the same time.

 

12:01.454 --> 12:05.091

If you are selling the US what else are you buying?

 

12:05.091 --> 12:09.462

We still might be the best house in a bad neighbourhood

 

12:09.462 --> 12:13.933

in terms of the growth that comes out of the debt ratio.

 

12:13.933 --> 12:17.970

Just to put a finer point on it, if you said that, okay, debt matters for your

 

12:17.970 --> 12:22.108

long term interest rates then why is it that Italy and Greece have lower

 

12:22.108 --> 12:24.210

interest rates than the US right now?

 

12:24.210 --> 12:27.179

There's more things going on to long term rates.

 

12:27.179 --> 12:31.350

Back to your question of did they have to do it, as an investor

 

12:31.350 --> 12:33.786

I'm not so sure.

 

12:33.786 --> 12:37.456

Let's go there and go to the discussion of what sort of comes out.

 

12:37.456 --> 12:41.627

The minutes came out and the headline is that

 

12:41.627 --> 12:45.865

more people than previously thought said that maybe there's

 

12:45.865 --> 12:48.734

a hike coming and therefore inflation.

 

12:48.734 --> 12:51.370

That was a little bit of a surprise to markets.

 

12:51.370 --> 12:53.506

Again, take us there.

 

12:53.506 --> 12:58.644

That's looking at dots, that's looking at minutes, that's

 

12:58.644 --> 13:00.312

looking at some surprising pieces to that.

 

13:00.312 --> 13:02.982

That's not really what Jay Powell said.

 

13:02.982 --> 13:06.519

He was quite careful not to say that even though he obviously knew what had

 

13:06.519 --> 13:09.255

gone on in the discussions.

 

13:09.255 --> 13:12.391

What do you think of the market reaction? Let's start there.

 

13:12.391 --> 13:16.562

The data is always interesting because Fed speak is Fed speak, right?

 

13:16.562 --> 13:19.331

I don't want to say that they're guessing just as much as we're guessing

 

13:19.331 --> 13:23.602

because they're informed guesses, theoretically, but

 

13:23.602 --> 13:26.038

they are just guesses and they are just talking.

 

13:26.038 --> 13:30.075

You can say a lot of things but at the end of the day they voted to cut

 

13:30.075 --> 13:34.113

interest rates last year, and at the day they may again vote to cut

 

13:34.113 --> 13:38.117

interest rates this year. To me, in the data that looks likely.

 

13:38.117 --> 13:42.988

The concern that they had going into last year was that tariffs will lead to

 

13:42.988 --> 13:46.091

... maybe they didn't say it exactly this way but tariffs might lead to

 

13:46.091 --> 13:49.695

sustained inflation. I'm sure that they didn't use those words but relative

 

13:49.695 --> 13:53.465

price increases might be the words that they use, but it didn't.

 

13:53.465 --> 13:57.436

You could see that, you see that in the historical data is

 

13:57.436 --> 13:59.538

that it usually doesn't because it's a tax.

 

13:59.538 --> 14:03.976

I think what we're hearing now is, well, growth seems like it's stabilizing,

 

14:03.976 --> 14:07.146

the labour market seems like it's stabilizing, manufacturing seems like it's

 

14:07.146 --> 14:10.482

recovering, so maybe growth will lead to more inflation so we should stay on

 

14:10.482 --> 14:10.649

hold.

 

14:10.649 --> 14:13.719

When I look at the data that's historically not been the case.

 

14:13.719 --> 14:17.923

It very well might be that, yes, we have these hawkish sentiments

 

14:17.923 --> 14:21.760

bubbling up but when the data comes to fruition, when we roll it forward eight

 

14:21.760 --> 14:24.864

months, are we sitting here looking in a situation where manufacturing

 

14:24.864 --> 14:28.300

recovered, the labour market recovered a little, and inflation continued to

 

14:28.300 --> 14:30.069

decelerate. I think that that's likely.

 

14:30.069 --> 14:34.173

If that is the case then the Fed will likely be able to cut because they

 

14:34.173 --> 14:38.944

can, regardless of what they say in minutes.

 

14:38.944 --> 14:42.414

Because they'll also be looking at the disinflation story, which you pointed

 

14:42.414 --> 14:46.185

out right at the beginning, and as well, let's go to the jobless number.

 

14:46.185 --> 14:49.255

This is initial jobless claims, it's a weekly report.

 

14:49.255 --> 14:52.057

I always think it's interesting. I think you've pointed out certain Fed chairs

 

14:52.057 --> 14:55.060

that said it was the most important one.

 

14:55.060 --> 14:55.694

Yeah, Greenspan.

 

14:55.694 --> 14:58.297

Was that Greenspan? Okay.

 

14:58.297 --> 15:03.369

However, it moves a lot because it's

 

15:03.369 --> 15:06.705

a weekly report so you have to kind of look at it over a longer period of time.

 

15:06.705 --> 15:09.675

It kind of points to the story though that labour's good.

 

15:09.675 --> 15:13.479

They can leave that on the side, focus on inflation, is that fair?

 

15:13.479 --> 15:16.982

It does seem like that in terms of you are seeing nascent signs of

 

15:16.982 --> 15:21.186

stabilization. I mean, initial initial employment claims have

 

15:21.186 --> 15:23.889

been low, especially when you rebase it for the population.

 

15:23.889 --> 15:26.592

There was a little back and forth because of the storm, storm sort of shifts it

 

15:26.592 --> 15:30.162

week to week, but when you look at initial jobless claims it's been low as a

 

15:30.162 --> 15:33.232

percentage of the population. There's not a lot of firing.

 

15:33.232 --> 15:36.402

When you look at continuing claims, those are people who stay unemployed,

 

15:36.402 --> 15:40.372

that's actually risen, not quite a bit but it's risen more

 

15:40.372 --> 15:43.809

than initial, which tells you that, look, there's not a lot of people being

 

15:43.809 --> 15:47.913

fired but it's hard to get rehired.

 

15:47.913 --> 15:50.082

That's what this job market has been.

 

15:50.082 --> 15:54.253

We are still seeing that there's not a whole lot of firing relative and

 

15:54.253 --> 15:58.390

now you are at least starting to see nascent signs of the non-farm

 

15:58.390 --> 16:02.594

payrolls pick up, and in the household report where there's some stabilization,

 

16:02.594 --> 16:06.598

where maybe there's not less hire, maybe there's just

 

16:06.598 --> 16:08.534

stable hiring.

 

16:08.534 --> 16:11.804

That's the first step in terms of the second derivative of stabilization.

 

16:11.804 --> 16:15.941

I don't know if they would leave it on the side but

 

16:15.941 --> 16:19.278

they're certainly saying, well, I'm less concerned about the labour market.

 

16:19.278 --> 16:22.748

The theory around that would be that I'm less concerned about the sustained

 

16:22.748 --> 16:26.986

impulse to a recession, which means that I need to be less concerned with

 

16:26.986 --> 16:29.722

having to lower interest rates because I have to.

 

16:29.722 --> 16:33.692

That have to discussion is definitely one part of the discussion of

 

16:33.692 --> 16:38.330

what they do but there is also the can part of discussion,

 

16:38.330 --> 16:40.566

which is the part that we're talking about.

 

16:40.566 --> 16:44.003

If we sit here looking back in four months and inflation continuing to

 

16:44.003 --> 16:48.007

decelerate then they're cutting because they can cut, not because they

 

16:48.007 --> 16:51.443

have to cut. That's the other part of the discussion that I think that they're

 

16:51.443 --> 16:53.545

likely to have over the next six months.

 

16:53.545 --> 16:56.749

That's what equity investors want, you want lower interest rates.

 

16:56.749 --> 17:00.119

That's sort of the bullish case, ultimately.

 

17:00.119 --> 17:03.322

Hello, investors. We'll be back to the show in just a moment.

 

17:03.322 --> 17:06.892

I wanted to share that here at Fidelity, we value your opinion.

 

17:06.892 --> 17:09.194

Please take a few minutes to help us shape the future of Fidelity Connects

 

17:09.194 --> 17:14.299

podcasts. Complete our listener survey by visiting fidelity.ca/survey,

 

17:14.299 --> 17:16.268

and you could win one of our branded tumblers.

 

17:16.268 --> 17:19.338

Periodic draws ending by March 30th, 2026.

 

17:19.338 --> 17:22.941

And don't forget to listen to Fidelity Connects, the Upside, and French

 

17:22.941 --> 17:26.979

DialoguesFidelity podcasts available on Apple, Spotify, YouTube, or wherever

 

17:26.979 --> 17:31.750

else you get your podcasts. Now back to today's show.

 

17:31.750 --> 17:35.854

Let's go to sectors which is what you do all the time, as well as all the

 

17:35.854 --> 17:39.658

other layers of incredible data that you provide for everyone joining you here

 

17:39.658 --> 17:43.962

today. We spoke to your colleague Bobby Barnes last week, taking

 

17:43.962 --> 17:47.533

us through the whole story for factors, which ones are pulling ahead, slightly

 

17:47.533 --> 17:52.204

interesting moment for momentum but also value and where that fits, he

 

17:52.204 --> 17:55.774

mentioned, and I thought I'd put this to you, that it's an interesting time to

 

17:55.774 --> 17:59.478

look, maybe, even more at sectors than factors.

 

17:59.478 --> 18:03.649

Obviously, he does both and so do you, but I just thought I'd

 

18:03.649 --> 18:05.350

put that to you.

 

18:05.350 --> 18:09.321

AI is the uber theme, it is the only thing that seems

 

18:09.321 --> 18:13.258

to matter if you ask certain people and everything else is secondary to

 

18:13.258 --> 18:17.596

that. In this moment, do you think sectors affected by

 

18:17.596 --> 18:21.667

AI are just a clearer place to look than maybe the factors within that

 

18:21.667 --> 18:24.736

kind of cut across sectors?

 

18:24.736 --> 18:28.440

I think that makes a ton of sense. I will say that I have always found sectors

 

18:28.440 --> 18:32.644

to just be the most specific of exposures

 

18:32.644 --> 18:35.180

that you can get, much more than value or growth.

 

18:35.180 --> 18:38.383

A lot of times when people ask me value or growth, small-cap and large-cap, it

 

18:38.383 --> 18:42.187

sort of depends on the sector. There's not a clear trend, you're usually

 

18:42.187 --> 18:46.391

betting on something that's 200, 300 basis points over or under just because

 

18:46.391 --> 18:50.229

it's so big and diverse, where sectors are much more specific.

 

18:50.229 --> 18:54.166

You get much more spread, you can really sort of see your bet

 

18:54.166 --> 18:57.636

and you see the patterns in the data, meaning that there's not a lot of

 

18:57.636 --> 19:00.873

patterns around value or growth because it trends for such a long time.

 

19:00.873 --> 19:03.342

There's a lot of patterns around sectors.

 

19:03.342 --> 19:06.445

You can see when a sector hits its valuation threshold.

 

19:06.445 --> 19:10.048

We talked about financials, we can certainly talk about technology and the

 

19:10.048 --> 19:12.551

downdraft that we've seen in software.

 

19:12.551 --> 19:16.655

All of that is much more specific in the data.

 

19:16.655 --> 19:20.792

Yes, whenever you have ... it's not systemic, I would not call

 

19:20.792 --> 19:24.930

AI systemic, but it's definitely an idiosyncratic shock that

 

19:24.930 --> 19:29.034

is shocking some industries much more than others, and

 

19:29.034 --> 19:33.005

we'll see over time, that's actually where you can see it in the data,

 

19:33.005 --> 19:36.008

specifically on valuation, because the market does not wait.

 

19:36.008 --> 19:39.311

It's a discounting mechanism. If they think that there is going to be a

 

19:39.311 --> 19:42.047

disrupter they're going to price that in ahead of time.

 

19:42.047 --> 19:46.118

What history can help you understand is what are the odds

 

19:46.118 --> 19:50.355

that any EBIT margin deceleration, operating profit deceleration,

 

19:50.355 --> 19:54.326

increasing free cash flow, what are the odds that whatever it is that

 

19:54.326 --> 19:56.929

you're worried about is already priced in?

 

19:56.929 --> 20:00.499

That's how you can use valuation in sectors, which is a lot less complicated

 

20:00.499 --> 20:05.037

than using valuation in factors.

 

20:05.037 --> 20:07.739

That's fascinating. Let's go to tech, let's go to the sector that's been ...

 

20:07.739 --> 20:11.877

it's software within but there's also overlaying

 

20:11.877 --> 20:16.014

that, really, the CapEx story which is just all kinds of cash.

 

20:16.014 --> 20:20.018

We're talking about fiscal impulses, this is a CapEx impulse

 

20:20.018 --> 20:24.056

that's dumping an awful lot of money into other sectors, probably the energy

 

20:24.056 --> 20:27.893

sector as well, or at least that's the story of how do you build the data centres.

 

20:27.893 --> 20:30.829

Take us there and how software sort

 

20:30.829 --> 20:35.133

of shifts within it but with this overlay of the CapEx being

 

20:35.133 --> 20:38.704

offered, promised. It's there.

 

20:38.704 --> 20:42.975

It is sort of interesting. With the downdraft in software stocks down 25%

 

20:42.975 --> 20:47.913

in a month is fairly rare for a sub-sector in the S&P 500.

 

20:47.913 --> 20:51.516

What you've seen over that is a huge valuation reset.

 

20:51.516 --> 20:54.286

You would think that you would see this sort of ...

 

20:54.286 --> 20:57.856

you get back to that people asking about, well, is this a bubble, is this

 

20:57.856 --> 20:59.992

basically the popping of a bubble.

 

20:59.992 --> 21:04.029

To me, in the data this just looks completely different from what we saw

 

21:04.029 --> 21:06.164

in technology as a whole.

 

21:06.164 --> 21:09.468

This is not to say that there won't be winners and losers within the software

 

21:09.468 --> 21:13.572

space and the CapEx, the hyperscalers they call it, there will absolutely be

 

21:13.572 --> 21:17.509

winners and losers. When you look at the broader sector of technology which

 

21:17.509 --> 21:20.445

includes semiconductors, which includes hardware companies, which, obviously,

 

21:20.445 --> 21:24.016

includes software companies and business services companies, you are still

 

21:24.016 --> 21:27.986

seeing sustained high free cash flow trends, especially

 

21:27.986 --> 21:29.988

relative to their sales base.

 

21:29.988 --> 21:33.925

I still think when you look at the data, yes, everybody's focusing on six or

 

21:33.925 --> 21:37.429

seven companies, not Apple actually, Apple's not actually spending a lot in

 

21:37.429 --> 21:39.898

terms of CapEx, but six or seven companies [crosstalk]...

 

21:39.898 --> 21:42.601

It's a consumer company all of a sudden.

 

21:42.634 --> 21:45.904

Well, that's true, but it's in the technology sector.

 

21:45.904 --> 21:49.975

The interesting part about this is when you start to narrowly focus on

 

21:49.975 --> 21:54.379

the trees instead of the forest I think you miss the big picture, where

 

21:54.379 --> 21:58.417

now what you're seeing is in the overall technology sector this is worse than

 

21:58.417 --> 22:01.320

the tariff tantrum in terms of the valuation support.

 

22:01.320 --> 22:03.889

We're back down to median levels.

 

22:03.889 --> 22:06.491

When you look at that through the aggregate sector historically I think we're

 

22:06.491 --> 22:09.795

below median levels. I just looked, it's the 38th percentile.

 

22:09.795 --> 22:13.732

When technology is in the 38 percentile of relative forward P/E when

 

22:13.732 --> 22:17.769

you go back to 1962 what are the odds that technology outperforms at

 

22:17.769 --> 22:21.773

70%? 70% is not 100 so Denise can certainly be wrong.

 

22:21.773 --> 22:23.875

What are the odds if EBIT margins decline?

 

22:23.875 --> 22:26.545

What if the sector becomes less profitable?

 

22:26.545 --> 22:30.282

Right now they're not. Right now EBIT margins are still increasing for the

 

22:30.282 --> 22:33.552

entirety of the sector, partly to your point, it's a little bit circular.

 

22:33.552 --> 22:37.622

The CapEx hyperscalers are spending to the semiconductor

 

22:37.622 --> 22:42.260

companies so that's harnessed within the technology sector overall.

 

22:42.260 --> 22:45.997

We haven't seen it. What are the odds that the sector under performs if EBIT

 

22:45.997 --> 22:50.035

margins decline? It's actually only 30%, which is kind

 

22:50.035 --> 22:54.206

of a statistical way to say, at this point, after this sell-off,

 

22:54.206 --> 22:56.708

a whole lot is already baked in the cake.

 

22:56.708 --> 23:00.245

The risk-reward for technology to me looks pretty decent.

 

23:00.245 --> 23:04.249

Right now you can say, well, Denise does that mean that it has to outperform

 

23:04.249 --> 23:07.185

by a thousand basis points like it almost did last year?

 

23:07.185 --> 23:10.822

Well, no, there might be other better sectors to invest in, and we can talk

 

23:10.822 --> 23:14.092

about the manufacturing recovery that is now nascent.

 

23:14.092 --> 23:18.163

That is definitely a new data point, definitely more sustained.

 

23:18.163 --> 23:22.434

You can say, okay, maybe technology shifts from leadership to the muddy middle.

 

23:22.434 --> 23:26.271

Maybe at times it's outperforming by 400 or 600 basis points, maybe at times

 

23:26.304 --> 23:30.075

it's underperforming a little, but generally speaking, technology as a sector

 

23:30.075 --> 23:34.179

has a positive risk-reward because there will be all kinds of things coming

 

23:34.179 --> 23:38.116

down the line that will be concerned about tech stocks but a lot of it is

 

23:38.116 --> 23:39.418

already in there.

 

23:39.418 --> 23:43.355

You've been bringing incredible research to us over the course of many months.

 

23:43.355 --> 23:47.993

One of the things was taking a look at the unit labour cost,

 

23:47.993 --> 23:52.030

that's been going up. Very interesting points to point towards a

 

23:52.030 --> 23:56.635

durable recovery. We've got manufacturing out this morning as well.

 

23:56.635 --> 24:01.072

It's been up for January but it's been up for some time now after a pretty long

 

24:01.072 --> 24:04.776

below 50 mark. This is the ISM, taking a lot at that.

 

24:04.776 --> 24:08.880

That also seems to be part of the durable story for another area

 

24:08.880 --> 24:11.716

of the economy that you're looking at. The numbers out this morning, they just

 

24:11.716 --> 24:15.153

add to your thesis?

 

24:15.153 --> 24:18.123

Absolutely. Industrial production, capital goods orders, all is sort of

 

24:18.123 --> 24:22.527

supporting the inflection that we just saw in ISM, which is a survey index.

 

24:22.527 --> 24:26.064

The interesting part about ISM is that we've had some false starts over the

 

24:26.064 --> 24:27.866

last three years of it being below 50.

 

24:27.866 --> 24:30.836

It popped above 50 but not by much.

 

24:30.836 --> 24:33.371

It's been, like I said, it's been a very different cycle.

 

24:33.405 --> 24:37.342

It never got to 30 which you'd go, buy all manufacturing stocks, that's sort

 

24:37.342 --> 24:41.279

of your signal, and it never recovered to anything meaningful either, anything

 

24:41.279 --> 24:42.981

over 52.

 

24:42.981 --> 24:45.383

We've just been languishing here.

 

24:45.383 --> 24:47.118

How do we know that this is another false start?

 

24:47.118 --> 24:51.189

You can see there's a couple of things that increase your odds that this is

 

24:51.189 --> 24:51.523

now durable.

 

24:51.523 --> 24:55.460

One is that new orders jumped 20% in

 

24:55.460 --> 24:59.197

a month. That's fairly rare. Historically it happens less than 5% of the time.

 

24:59.197 --> 25:03.268

The 5% of the time it happens it usually means the ISM recovery

 

25:03.268 --> 25:06.004

stays above 55 for the course of the year.

 

25:06.004 --> 25:11.042

The second part is what we started on, inflation continues to decelerate.

 

25:11.042 --> 25:15.213

That is the exact sweet spot for manufacturing to be

 

25:15.213 --> 25:18.216

able to be durable and stay above 50.

 

25:18.216 --> 25:21.853

If we highlight these two things that make this recovery durable this is a

 

25:21.853 --> 25:25.223

change. This is change from anything that we've seen over the last three years.

 

25:25.223 --> 25:26.992

What does it mean for sectors?

 

25:27.025 --> 25:30.962

It means industrials tend to be the best performing sector, 70

 

25:30.962 --> 25:35.000

to 75% odds, again, not 100, but what you can see is if we

 

25:35.000 --> 25:39.104

are in the regime of ISM, that survey, above

 

25:39.104 --> 25:42.474

50 and rising, this is the way I like to look at the survey, you can look at

 

25:42.474 --> 25:46.511

above 50 and rising, which is expansionary, below 50 and

 

25:46.511 --> 25:50.382

rising, contractionary but rising from that, or the other two verticals, you'll

 

25:50.382 --> 25:54.519

find that this is the sweet spot for industrial stocks to

 

25:54.519 --> 25:55.887

actually shine.

 

25:55.887 --> 25:57.923

There have been some laggard sectors.

 

25:57.923 --> 26:01.927

Defence and aerospace has been a sweet spot that has outperformed but

 

26:01.927 --> 26:04.029

transportation has not.

 

26:04.029 --> 26:07.699

Builders is in construction discretionary but building and construction

 

26:07.699 --> 26:09.634

materials also have not.

 

26:09.634 --> 26:13.772

I think that there are some opportunities in the laggard sector that are more,

 

26:13.772 --> 26:17.576

and now I'll use the term that people usually want to use, the cyclical

 

26:17.576 --> 26:21.913

recovery. I usually say economically sensitive but this is more a true cyclical

 

26:21.913 --> 26:23.748

manufacturing recovery.

 

26:23.748 --> 26:27.786

I think that there are some options for investors that aren't technology that

 

26:27.786 --> 26:32.090

are levered to something else as both the economy broadens and

 

26:32.090 --> 26:36.061

as the earnings growth story broadens.

 

26:36.061 --> 26:39.364

The question is always, is this AI, what's underpinning this.

 

26:39.364 --> 26:43.702

You're talking about it being more economically, cyclically rooted.

 

26:43.702 --> 26:47.906

We've got the interest rate story there but it is the AI story, is it

 

26:47.906 --> 26:49.708

not?

 

26:49.708 --> 26:54.045

So AI, when you add it up from a GDP perspective, I think is about 6% to 7%

 

26:54.045 --> 26:57.115

of GDP.

 

26:57.115 --> 26:59.651

Technology, I mean, there are a lot of people who add it  up a lot of different

 

26:59.651 --> 27:03.888

ways and they include power and then it's like 30%, but power was always

 

27:03.888 --> 27:08.493

kind of 20% so you've got to sort of think about the incremental.

 

27:08.493 --> 27:12.530

AI, not yet. I mean, right now in terms of boots on the ground

 

27:12.530 --> 27:15.333

where are you seeing the productivity increases and where are you seeing the

 

27:15.333 --> 27:18.136

creative destruction, you're seeing it in software.

 

27:18.136 --> 27:21.940

You're definitely seeing software engineers become increasingly productive at

 

27:21.940 --> 27:26.378

an increasing rate that is more exponential than anything that we've ever seen.

 

27:26.378 --> 27:29.614

I don't want to diminish people who are tech investors that focus on

 

27:29.614 --> 27:30.281

technology.

 

27:30.281 --> 27:33.885

There is some real change going on that is really rare.

 

27:33.885 --> 27:37.522

The question is, is that idiosyncratic within the technology sector right now

 

27:37.522 --> 27:40.291

or is it systemic to the entire economy?

 

27:40.291 --> 27:42.260

I would say it's not systemic yet.

 

27:42.260 --> 27:46.297

It might take much, much longer than you think to sort of have

 

27:46.297 --> 27:48.366

a nationwide effect.

 

27:48.366 --> 27:51.403

This will evolve. This is definitely a change.

 

27:51.403 --> 27:54.439

The market's a discounting mechanism so it's going to price it in ahead of time

 

27:54.439 --> 27:58.743

but I think in that pricing in ahead of time I think there's some fear around

 

27:58.743 --> 28:02.681

something that might just be a growth catalyst for

 

28:02.681 --> 28:04.983

a durable economic cycle.

 

28:04.983 --> 28:09.054

That is so much more appealing, you would imagine, for many investors to invest

 

28:09.054 --> 28:13.024

in with those parameters than it's the AI

 

28:13.024 --> 28:17.062

trade, we're not sure where it's going.

 

28:17.062 --> 28:20.165

We were at the beginning, it appears, of an industrial revolution, we don't

 

28:20.165 --> 28:22.567

know where it is going to land, obviously.

 

28:22.567 --> 28:24.602

Some of those numbers point to a place.

 

28:24.602 --> 28:28.640

Can you just list out the sectors as you have them in order,

 

28:28.640 --> 28:31.276

top and bottom three.

 

28:31.276 --> 28:35.613

Top three, bottom three. Industrials now number one, so that's a big change.

 

28:35.613 --> 28:38.883

I would say followed up by financials which still looks like a positive

 

28:38.883 --> 28:41.986

risk-reward given valuation. I would say the call option on deregulation.

 

28:41.986 --> 28:46.024

Then consumer discretionary within specifically

 

28:46.024 --> 28:50.028

housing. Housing intrigues me more and more with the recovery

 

28:50.028 --> 28:54.299

in manufacturing. Industrial, financials and consumer discretionary

 

28:54.299 --> 28:57.602

on the top three. On the bottom three I would say, look, there's been a little

 

28:57.602 --> 29:01.673

bit of a defensive rotation so people getting concerned about AI,

 

29:01.673 --> 29:05.610

other things, other geopolitical events, and you've seen consumer staples pop,

 

29:05.610 --> 29:09.981

you've seen utilities pop, you've certainly seen energy pop, all

 

29:09.981 --> 29:14.319

three of those would be my underweights. It would be exceedingly rare

 

29:14.319 --> 29:18.389

for defence to be sustained in terms of outperformance,

 

29:18.389 --> 29:22.494

and by exceedingly rare I mean 20%, 20% is not zero but exceedingly

 

29:22.494 --> 29:26.531

rare to me is under 30, so exceedingly rare for defence

 

29:26.531 --> 29:31.669

to catch a sustained bid in a manufacturing recovery that is disinflationary.

 

29:31.669 --> 29:35.774

Consumer staples, utilities are two of the bottom three, and

 

29:35.774 --> 29:39.444

then energy. I still think that energy, the risk-reward is negative because

 

29:39.444 --> 29:43.515

they're still too profitable this cycle and still have more

 

29:43.515 --> 29:45.884

downside in terms of earnings.

 

29:45.884 --> 29:49.988

We'll see where the geopolitical events settle out but generally speaking,

 

29:49.988 --> 29:54.659

the more that you have with less sustained upside in  crude is

 

29:54.659 --> 29:59.164

usually the point to sell, not necessarily chase.

 

29:59.164 --> 30:03.802

That's not what some Canadian investors want to hear.

 

30:03.802 --> 30:06.971

We don't really have time for this but it's sort of a noteworthy question so

 

30:07.005 --> 30:11.242

I'm going to squeeze it in. Do you think the economy will react after a new Fed

 

30:11.242 --> 30:14.145

chair takes over later this year?

 

30:14.145 --> 30:17.315

I don't think so, no.

 

30:17.315 --> 30:21.653

Okay, we'll just leave it at that. Denise Chisholm, we are so grateful for your

 

30:21.653 --> 30:24.856

time and incredible answers to all of our questions.

 

30:24.856 --> 30:26.991

Thank you for joining us. We'll see you soon.

 

30:26.991 --> 30:28.459

Always great to be here.

 

30:28.459 --> 30:32.397

Thanks for watching or listening to the Fidelity Connects

 

30:32.397 --> 30:36.534

podcast. Now if you haven't done so already, please subscribe to Fidelity

 

30:36.534 --> 30:39.337

Connects on your podcast platform of choice.

 

30:39.337 --> 30:42.173

And if you like what you're hearing, please leave a review or a five-star

 

30:42.173 --> 30:46.144

rating. Fidelity Mutual Funds and ETFs are available by working with

 

30:46.144 --> 30:49.514

a financial advisor or through an online brokerage account.

 

30:49.514 --> 30:53.218

Visit fidelity.ca/howtobuy for more information.

 

30:53.218 --> 30:57.055

While on Fidelity.ca, you can also find more information on future live

 

30:57.055 --> 31:01.192

webcasts. And don't forget to follow Fidelity Canada on YouTube, LinkedIn,

 

31:01.192 --> 31:03.194

and Instagram.

 

31:03.194 --> 31:06.064

We'll end today's show with a short disclaimer.

 

31:06.064 --> 31:09.901

The views and opinions expressed on this podcast are those of the participants,

 

31:09.901 --> 31:13.838

and do not necessarily reflect those of Fidelity Investments Canada ULC or

 

31:13.838 --> 31:17.842

its affiliates. This podcast is for informational purposes only, and should not

 

31:17.842 --> 31:20.378

be construed as investment, tax, or legal advice.

 

31:20.378 --> 31:22.680

It is not an offer to sell or buy.

 

31:22.680 --> 31:27.018

Or an endorsement, recommendation, or sponsorship of any entity or securities

 

31:27.018 --> 31:31.823

cited. Read a fund's prospectus before investing, funds are not guaranteed.

 

31:31.823 --> 31:35.393

Their values change frequently, and past performance may not be repeated.

 

31:35.393 --> 31:39.230

Fees, expenses, and commissions are all associated with fund investments.

 

31:39.230 --> 31:41.532

Thanks again. We'll see you next time.