What history reveals about markets: Insights from Denise Chisholm - October 23, 2025
Fidelity’s Director of Quantitative Market Strategy, Denise Chisholm, shared her insights on the nuanced factors influencing market returns beyond traditional valuation metrics, emphasizing the importance of crisis endings, earnings growth, sector rotation and debt profiles in investment decision-making.
Here are some of the key points from her commentary.
The limits of CAPE ratio in predicting returns
Denise challenges the notion that the Cyclically Adjusted Price-to-Earnings (CAPE) ratio alone can reliably predict market returns. While CAPE has been a popular tool for forecasting long-term returns by smoothing earnings over a decade, its predictive power diminishes significantly when crisis periods are excluded. Historical data shows that markets starting at high valuations but avoiding crisis endings tend to preserve returns better. Therefore, CAPE should be considered as one component within a broader analytical framework rather than a standalone indicator.
Crisis endings: A variety of factors contribute to long-term performance
The nature of market cycle endings, particularly when they coincide with major economic crises, can significantly influence long-term returns. Events such as World War II, the inflationary recessions of the 1970s and 1980s, and the 2008 financial crisis have reshaped market trajectories. Ending a cycle amid a crisis can reduce annualized returns by approximately 10 percentage points over ten years. This underscores the need for investors to incorporate macroeconomic risk assessments and monitor indicators that signal potential crisis resolutions or escalations.
Earnings growth: The core engine of market returns
Earnings growth is identified as the fundamental driver of market returns, often outweighing valuation metrics. Markets may appear expensive if earnings are overestimated, but sustained earnings growth can justify higher valuations and support positive returns. For example, U.S. equities have shown re-accelerating earnings growth, explaining their resilience despite elevated valuation multiples. In some cases, slower earnings growth in international markets may contribute to their lower valuations. Investment decisions should balance valuation with earnings prospects to capture true market potential.
Sector rotation and global equity dynamics
Recent market trends reveal a rotation into international equities influenced by shifting earnings dynamics and valuation differences. While U.S. markets benefit from strong earnings momentum, some international regions, particularly in Europe, face decelerating earnings growth, raising concerns about value traps. However, emerging positive data on European spending and earnings suggest opportunities for diversification.
Debt profiles and policy environment: Assessing market risks
Varying debt levels across government, corporate, consumer and financial sectors add complexity to market analysis. Historically, consumer debt service ratios have remained favourable, in contrast to the steady rise in government debt since the 1930s. Notably, higher debt levels do not consistently predict weaker equity returns, suggesting that credit risks tend to be idiosyncratic rather than systemic. Market conditions are also shaped by monetary and fiscal policies, with stimulus measures typically aligning with recovery phases rather than acting as preventative tools.
Conclusion: Embrace nuance for strategic advantage
Denise’s insights emphasize that successful market navigation requires embracing the complexity of valuation, earnings growth, crisis impacts and policy dynamics. Relying solely on metrics like the CAPE ratio can be misleading without considering broader economic contexts and market cycle endpoints.
