FidelityConnects: Denise Chisholm – Sector watch – August 22, 2025

[00:00:26] Glen Davidson: Hello, and welcome to Fidelity Connects. I'm Glen Davidson. With tariffs, commodity markets and earnings season surprises making headlines it seems everything is boiling down to one big question. Is this the beginning of a new era in global trade? If so, what might global trade 2.0 mean for advisors and investors? Joining me today to unpack the research and help answer these questions and more is Fidelity Director of Quantitative Market Strategy, Denise Chisholm. Welcome Denise, so great to see you.

[00:00:55] Denise Chisholm: Hey, Glen, it's great to be here.

[00:00:56] Glen Davidson: Denise, I'd love to talk about a bit of a behind the scenes point, if I could, to start off. You are part of Quantitative Research and Investing, QRI, as it's called. Fidelity has quantitative, technical, and fundamental research all combined into a bit of a Venn diagram. You're underlying that quantitative group but you sit with the equity research associates who are the more fundamental people. Why is that?

[00:01:23] Denise Chisholm: Because at the end of the day we're all trying to get names into the funds that we think could produce alpha for our portfolio managers. It doesn't really matter your discipline. I mean, obviously, you highlighted the three ways that you could pick stocks, fundamental, they talk to the individual companies, they build company models, they have recommended price targets, and then they recommend stocks based on that. Obviously, the technical staff doesn't look at any of the fundamental data, just looks at those price patterns. Then there's quant in the middle which there are a zillion different ways to sort of tackle the quantitative approach. My specific approach is based on historical patterns and historical probabilities and at the end of the day that is where I sit. Equity research, where I recommend ... instead of individual securities I recommend sectors, industries, sub-industries, and I talk about the market backdrop all within the context of history. As much as, yes, every cycle is different the patterns that underpin those cycles are remarkably similar. Using those patterns from a historical perspective can make you a better investor and they can help you not fall prey to some of the pitfalls associated with data-driven investing and, hopefully, can make money for our diversified portfolio managers as well.

[00:02:44] Glen Davidson: As a partner for the portfolio managers and the equity research associates it's efficient for you to be located where you are, and they're coming at you all the time and you're going to them as well with ideas.

[00:02:56] Denise Chisholm: Now we operate on Teams and on Zoom so it doesn't really matter where people are but, yes, I'm pinged multiple times a day through multiple venues, people either stopping by, people wanting a quick Teams chat or people saying, hey, have you seen this data or what do you think of this data, all the time. It is a lot of our diversified portfolio managers but it's also our asset allocators. It's not only our fundamental analyst in equity, it's often our fundamental analyst in fixed income. We're all sort of one big team, again, trying to figure out the same thing, which is what are the best risk-rewards in the market and how can we figure that out together.

[00:03:36] Glen Davidson: Every webcast that's being broadcast seems to have AI woven through it. How does AI help you in your day-to-day?

[00:03:45] Denise Chisholm: In a lot of ways. I always say that I'm not a particularly good writer. I like to talk a lot. I, obviously, love to do research and find the patterns in the historical data. Sometimes I've had trouble in the past in terms of writing to sort of boil it down in a way that's easily consumable. A lot of the framework that I can produce can be much more succinct if I use AI as a helper. There's often times where I'll put in what is in Denise Chisholm's brain and it'll spit out three or four options that sort of distil it in a way I hadn't really thought about before that helps somebody that maybe doesn't have the same investment acumen as either an advisor or as an analyst that can help you sort of get across your point in terms of understanding. In some ways I use it a lot when I write and to make more succinct points. I think it makes me a bit more efficient. It certainly makes me more thoughtful and, I think, deliberate in terms of where my writings and my white papers can all be consumed into other investment disciplines.

[00:04:55] Glen Davidson: It sounds like you've embraced it well and it is a great asset to you in your day-to-day so that's good to hear. What about the current momentum that we're seeing in the market today? Can you comment on how much of that is driven by the retail investor versus the institutional investor.

[00:05:12] Denise Chisholm: We've seen a lot of retail investment buying, I would say, over the course of the last 16 weeks or so. In some ways mathematically you would say that retail bought the dip. Institutional has been more steady state. I wouldn't say that they weren't necessarily in outflows but they weren't in inflows as well. The interesting part about the momentum in the market was not necessarily who it's driven by but just that it was so rare that the market goes up 25% in, basically, 14 to 16 weeks. That's only a feat that has happened less than 1% of the time. When you look back historically, sometimes it's coming out of recessions but when it has happened in the past, not only if you cherry pick that 1% of the times it's happened 100% of the time the market is up that you're following, meaning that this is a good risk-reward signal. The interesting part is not just that 1% slice. The interesting part when I study that market history in terms of momentum, which to your point was driven by retail investors, is that there is a pattern there. The more the market has gone up the more the more market is likely to go up in the future. That's why we always call stocks a leading indicator because somehow, some way, they actually see the future a lot better than some of the data that we're analyzing on a day-to-day basis.

[00:06:38] Glen Davidson: The success of the market brings on more success of the market, is what you're saying, typically.

[00:06:44] Denise Chisholm: Yes, in some ways the pattern really is an underlying component of the fact that, look, we were, let's call it bear adjacent of those dog days in April when the tariffs were initially announced. That 20% down essentially led to a rolling, let's call it, six to nine-month period of below average returns. The big trade that we saw that looks so strange, that almost looks like the market's tone deaf or cantilevered or too far too fast, you can look at it statistically and say, because of that almost bear market that was more likely statistically a catch-up trade where the market discounted something like a recession that doesn't seem to be ending up happening. When we saw that movie before where the market, I would say on my map, fully discounted a recession in 2022 with a defensive rotation, a peak-to-trough contraction of almost 30% in the S&P 500, two back-to-back quarters of GDP declines on a real basis, those checkboxes, when you discounted a recession that didn't end up manufacturing in terms of job loss, well, that led to upside in the equity market of about 75% over the next 2 1/2 years. When you make that math and you guess at a recession and you get that math wrong there is a substantial upside risk. I think that that's the beginning stages of what the equity market is saying we are still in the throes of.

[00:08:11] Glen Davidson: Interesting. Is it a fair comment that the retail investor has more appetite for risk than institutional? You mentioned that the retailer investor seemed to be the one that jumped in when there was a correction back in the spring. There's also a lot of solutions and products coming out now in the industry that are very specific, that are tied to leverage. SPACs are being talked about again. There just seems to be a lot more of that mentality of I want more risk. Is that a fair statement?

[00:08:39] Denise Chisholm:  I don't know if it's a fair statement when you think of tolerance of risk  because when you look at the individual data going back 10, 15, 20 years what you find is the retail investor doesn't usually achieve the average returns that the equity market generates of around 8% because they're too busy either buying tops or selling bottoms, which is not exactly the same thing as they are able to tolerate risk. It does mean that they are sometimes the bell ringing of euphoria at the tops of markets which is something that, to your point, we saw a little bit in 2021 with much more SPAC, much more IPOs, much more sort of risk-taking behaviour. We're not seeing the same kind of risk-seeking behaviour right now even though, yes, meme stocks have come back a little, SPACs have come a little but we're not seeing nearly the same as we've seen in euphoric classic, late stage secular bull market, bubble-esque conditions. We'll see how the retail investor tolerates. Now, we did see in this bear market, or the close to bear market, we saw in April the retail investors did, in fact, double down which is, historically speaking, rare. Maybe we're seeing a turn where retail investors are a little bit more risk tolerant but, historically, in the past that hasn't really been the case.

[00:10:06] Glen Davidson: Very interesting. It sounds like on a relative basis it's a bit more comfortable right now than in the past. The VIX is something that you've talked about as far as often people would think, well, that's a volatility index. If it spikes all bets are off. You actually see that quite differently. Could you talk about that, please?

[00:10:24] Denise Chisholm: It's very much the opposite. I mean, you can see the patterns in the data. The higher the VIX is, meaning the more fear there is in the equity market, the more likely the equity market is to be higher over the next 12 months. You can consider it a panic index, which is not to say that there's ever good news that happens right after the VIX is, let's call it, top quartile position, say, above 35. It doesn't usually mean that you get good news and that turns the market. It just usually means that the market has fully priced in most of the bad news that is out there. Said differently, there's nobody left to sell, which is not to say that there's not any individual left to sale but for the most part the sellers have likely already sold. The next move is usually an incremental positive which leads to incremental buying. That's why sort of top quartile VIX position, anytime you see a VIX above 35, and especially with what we saw above 50, if you have a one-year time horizon usually that is the hold your nose, close your eyes and buy as an equity market investor.

[00:11:26] Now, the interesting thing about the VIX is it's an asymmetrical signal. What I just told you is a high VIX tells you that there's fear in the equity market. That's usually a contrarian good signal. So, Denise, does a low VIX mean complacency and does that mean it's a sell signal? No. In fact, it doesn't. Ironically, you get this weird U-shaped pattern in terms of the VIX, meaning when the VIX is complacent, let's call it, bottom quartile positioning, I think that that's, let's call it, under 18, when it's under 18 that's actually the underpinning of a secular bull market, meaning that you usually have complacency at the point at which the market is going higher. That's often a good situation, and a high VIX is a good situation, it's usually in that muddy middle where the VIX is in a certain range and going higher where you actually see the problems associated with the market.

[00:12:22] Now, the interesting part about what I would call our leg of the secular bull market is we keep gyrating between very high Vix conditions, a whole lot of fear, and boom, right back down to complacency. Statistically, you're bouncing in between the two best set-ups statistically for the market. A whole lot of fear that gets resolved quickly, it is usually a good complacency environment for an underpinning of a secular bull market, which I do think continues.

[00:12:50] Glen Davidson: You are a consumer of a vast amount of data and you articulate what you interpret from that extremely well. Data revisions, though, and more topical recently with the Labour Department, are they anything new? How do you deal with the fact that it may not be what it seems?

[00:13:08] Denise Chisholm: No, they're definitely not new. I mean, it's funny because I've been talking about payrolls now for the last 11 years when people ask me to talk about data and every time somebody asks me to talk about payroll revisions I kind of cringe because for the most part what we know in terms of month-to-month — remember it's a month-to-month figure, those payroll, they're job gains. They get so heavily revised that they could be, even on a good steady state platform, a hundred thousand more in a given month or a hundred thousand less in a given month. So you get revisions not only just the one month, two month and three months, so by your third revision you're usually at like a 90+% response rate but then those revisions get revised over the next three years when we get more data and we get more adjusted in terms of seasonal factors. What you find is there's a whole lot of volatility around what that payroll print is and, in fact, you don't know what it actually is until three years later. Data revisions are nothing new. It's certainly one of the most heavily revised data sets. The interesting part about it is you do get massive downward revisions in turning points from an economic perspective. They're also nothing new but the revisions that we just saw were some of the largest in history over that course of the three months that we saw.

[00:14:31] Even when you renormalize it for the total payroll numbers, which is something you have to do since payrolls grows over time, but when you think about that, okay, that downward revision, is this a good thing, is it a bad thing? It sounds like a really bad thing. We just lost jobs that we thought we had, doesn't that mean that the economy isn't on as strong a footing as we thought and won't that be a problem for the stock market? Well, let's look at the data historically since we have it all, and we can look at those revisions, and the interesting thing here is that you find that same contrarian pattern. The bigger the downward revision the more likely the market is to be higher over the next year. Why? Because the market has already given you below average returns, meaning it's almost like the stock market foresaw the bad payroll data and then stocks actually anticipated better payroll data in the future.

[00:15:28] That is one of the reasons ... we just talked about the momentum in the stock market, it's almost like stocks are seeing the future, that's why we call them forward-looking. If you've ever heard the term payroll data or jobs growth is a lagging indicator that's why as well, because usually by the time at which you've seen the downward revisions it's already been discounted in the market. To put a finer point on it, it could very well be that that almost bear market in April foresaw the bad labour data that we just saw in the payroll print, and what stocks are potentially saying now is that that is likely to be a pause that potentially refreshes. That's, I think, how you can interestingly put together a story where, again, I think you have to be careful as an investor, understanding where you're focused on noise, the labour market, and the signal, the stock market, and how you can use those data points to make sure that you don't make mistakes as an investor.

[00:16:30] Glen Davidson: That's a very interesting connection. By the way, your role, one of your many roles, is to reduce the noise and really see the signal and then interpret that. That's an interesting place to be.

[00:16:42] Denise Chisholm: That is certainly the hope.

[00:16:43] Glen Davidson: Yeah. Why don't we talk about tariffs? Aren't they already priced in  because they've been going all over the place and lots of guarantees and this, that and the other thing, and delays, where do we stand with tariffs?

[00:16:54] Denise Chisholm: I think that the answer to that succinctly is yes, I think it's been priced in, despite the fact that the market's up 25% over the last 16 weeks and now ahead of where the tariffs were rolled on. I think when you go through the math of tariffs, remember, we're probably landing around 15% tariffs which isn't anything that we've seen since, basically, Smoot-Hawley. If you think about tariffs like a tax, and this is really no different, prices of goods are going up, it's not clear who is going to absorb them. Farm producers will absorb some, U.S. consumers will absorb some, currency might absorb some, and then what doesn't get absorbed through that will end up getting absorbed through corporate America's profits. We don't exactly know where it's going to be absorbed but we can make some guesses, and some onerous guesses, to say that half ends up in the U. S. consumer's pocket and when they don't spend money on the goods prices that goes up, well, then the other half is going to end up in corporate America's margin contraction.

[00:17:53] If we say that, that's about $500 billion, $250 billion is going to be borne by the U.S. consumer, $250 billion is borne by corporate America, is that enough to create a tipping point into recession? The answer is no, historically it's not. It's a 1% headwind to income, which seems like a lot, but we've actually had that before in at least three instances of actual tax hikes. The reason why 1% headwinds are not enough is because usually there's other tailwinds that you're not measuring. The big tailwind that I don't hear a whole lot of people talking about is still the decline in gas prices and energy prices. That $85 to $65 a barrel is basically the equivalent of a 1% tailwind, which means that the energy prices are potentially offsetting the tariffs, which puts us in a situation where maybe it's not enough of a tipping point to tip the U.S. consumer negative into recession. Now we get back to what the stock market has discounted. At those lows in April the 20% down figure was essentially discounting a 15% earnings growth contraction. Well, not only did that not end up happening but earnings numbers came down way too far. I mean, July 1 expectations were for either flat earnings where, certainly, financials, technology and communication services all beat by double digits.

[00:19:21] So not only does the 10% earnings growth expectations we had coming into the year not going down to meet 15% but it's starting to look, especially after the recent legislation, that the numbers are too low and have to come up. Now we're in a situation, to sort of sum it up and back to tariffs, where tariffs aren't enough of a shock to the consumer to tip us into a recession. At the same time, when stocks discounted a much bigger impact that doesn't seem to be ending up happening with multiple tailwinds might actually have numbers coming up, not down over the next 12 months.

[00:19:58] Glen Davidson: Earlier in that excellent non-AI answer, because that was you, you mentioned the U.S. dollar. What does a weaker U. S. dollar mean for the globe?

[00:20:08] Denise Chisholm: The weaker U.S. dollar, it's interesting. I get a lot of questions on is this going to be a problem for equities? Is this going be the end of an era as we know it? We've seen dollar depreciations many times in the past,  we have the trade-weighted dollar going back to, well, whenever it started to float, 1972. You can look at the data, we've had at least three or four big depreciations. Ironically, all of them had higher real GDP growth and then higher stock prices and higher earnings growth after it. The decline of the dollar might not necessarily be the end of what I would call U.S. exceptionalism or the stock market, the secular bull of the stock market, as we know it. Again, remember, 40% of S&P revenues is from overseas, which means that that dollar translation of a weaker dollar actually comes back into higher earnings growth and higher revenues printed in the S&P 500. It isn't necessarily a bad thing, and dollar depreciations don't necessarily mean the decline of the dollar as a reserve currency. Again, we've sort of seen this movie before.

[00:21:20] Now, all of that said, I'm not particularly bearish on the dollar, and it's mainly around what I think is going to be an acceleration in not only U.S. GDP growth, because there's going to be less of that, but in U.S. corporate profit growth. The legislation that was just passed was effectively a 700 basis point cut in the corporate tax rate. That means that after tax revenues and after tax earnings are going to, again, sort of be the ballast for numbers to come up over the next year. I think it's going to be hard for ex-U.S. companies to keep up in that environment. I mean, there are some estimates that say 7% is probably over the next two to three years on an annual basis going to be the increase in free cash flow growth in the technology sector.

[00:22:11] This is not something that should be taken lightly. I think we have a lot of tailwinds, specifically for corporate America, specifically for U.S. stocks, which might keep the dollar firmer than you think. When you think about sort of the differential one of the biggest underpinnings to currency differentials is relative growth. If what we've seen over the last, let's call it, six months which was U.S. GDP decelerating with the rest of the globe getting better, it could very well be over the next 12 months that that reverses.

[00:22:44] Glen Davidson: Do you have other thoughts on potential outcomes for U.S. isolationism with the rest of the world?

[00:22:51] Denise Chisholm: Yeah, we'll see where that goes. I always get very nervous thinking about long term trends that you think you should be able to capitalize on as a U.S. investor, or just as an investor. If you boil it down to do we think that global trade is going to slow and then slow as a percentage of global GDP over the course of the next three to five years. If you plot that out, or if you plot U.S. trade or anything like that, you'll see that there's really no relationship between that and stock returns. The same thing you see with deficits, debt as a percentage of GDP, there hasn't been a consistent relationship. Again, to sort of put a fine historical point on it, one of the times when you see in history that you think something that should absolutely matter, which is to say two recessions, didn't matter to U.S. stocks in the '70s and '80s. The low in the market between 1976 and 1985 was not 1982, which was the second of the two back-to-back recessions. It's before either recession happened in 1978.

[00:24:00] When you think about what U.S. isolationism might mean, what the decline in global trade might mean, think about starting points in the '70s at which point you'd say, jeez, this is sort of the end, literally, of American exceptionalism in that we will have two back-to-back recessions with the second recession being the longest and deepest since the Great Depression, and the equity market went up through the entire thing. The low in 1982 was higher than the low in 1980 which was higher than the low in 1978. Back to that, you could hold your nose, close your eyes, you'd be surprised what the stock market can discount. Again, I'll sort of sum it up by saying that I think it's risky to take one theme, think that it means something and to assume that the equity market hasn't already discounted it when a lot of the themes that are visible, the more visible they are the more likely the market has already appropriately discounted it.

[00:24:57] Glen Davidson: Thank you. I'd like to ask you about the great country of Canada, your thoughts on energy and gold.

[00:25:04] Denise Chisholm: Let's definitely talk about energy. No change in my thoughts on energy. I think if anybody's tuned into webcasts in the past they know I'm not enamoured with it. I think you do have a consistent supply problem. It's not necessarily the fact that certainly shale production will slow at some point, although we're not really seeing it yet, and, obviously, OPEC has taken a lot of barrels out of inventory but the market's smart enough to know not to price current inventory. Even if shale production were to slow, if you saw oil prices actually spike back up into the 80s or the 90s, well, then that production would come back on as well. The problem with knowing that there's global excess supply, which is, I think, going to be a 5 to 10 year problem, if not longer, is that the market's smart enough to know that there is a ceiling. Whenever there is a visible ceiling when barrels might come back on, well, then the risk-reward isn't as unique and isn't as palatable for investors. In that way I think energy stocks are going to have a tough time keeping up with the rest of the market because their upside is potentially capped on that and we're already seeing above average margins, which means that until we get back to normalized margins nothing even like valuation, I think, provides a really strong risk-reward. Energy is the only unique cyclical sector, or economically sensitive sector, where you get trough or very low multiples, meaning your lowly valued stock, on low earnings as well. I think you get that sort of double hit in energy where you don't usually get it in other places. I think because of the supply dynamics, because the fundamentals are still declining, I'm definitely on the negative side of the risk-reward for energy stocks relative to the S&P 500.

[00:26:53] Now gold, gold you can talk about in terms of the commodity, which I do think of all the commodity trends out there that is the most sustainable one, which isn't to say that I do think it's a secular play on either the basement of the U.S. dollar or either of lower or higher interest rates. It's just got the opposite supply dynamic as oil does. From a commodity perspective it's just a better supply and demand picture. Gold miners are a little bit of a different story. I think that it's, again, going to be a tough time to keep up with the rest of the S&P 500 when you see, even with gold prices where they are, because it takes so much money to get the gold out of the ground capex relative to sales is much higher in those gold miners than it is even in the oil patch. What you find is that the free cash flow is not nearly as good cycle-to-cycle. It's tough, the gold stocks don't nearly keep up with the commodity as well as you would expect because they do just burn more cash cycle-to-cycle than most other ventures, say, even technology. I think gold as a commodity, plus, energy as a stock relative to the S&P 500, minus. The same thing would be the gold miners relative to the rest of the S&P 5.

[00:28:13] Glen Davidson: Excellent. Why don't we sum up our webcast with this, what are you keeping a keen eye on for the second half of 2025?

[00:28:21] Denise Chisholm: I always keep my eye on the same thing, which is to say the credit markets. High-yield spreads are the way that I think about what is priced or what is potentially problematic in the market. We talked about the VIX and when there's a whole lot of fear in the equity market that tends to be a good thing. It's even better when there is a whole lot of fear in the equity markets relative to the fear in the credit market, because the credit market, historically speaking, has been the smarter market. When I see valuation spreads, which is a quantier way to look at risk, or the VIX, or something like that, when I see them still be in the top quartile of their history versus the credit market being relatively tight saying, there's not really any problem in terms of defaults or solvencies over the next couple of years, we feel pretty good about that, that's usually a great set-up for a continuation of the secular bull market. Most times what I'm watching is how the credit market behaves in terms of the risky behaviour that we see.

[00:29:21] Glen Davidson: Denise, so wonderful to talk to you. As always, a wonderful update. Appreciate your time. Thank you for being with us.

[00:29:27] Denise Chisholm: Always great to be here.

[00:29:29] Glen Davidson: Thank you for being with us as well. Coming up on Fidelity Connects, on Monday Andrei Bruno, Director of ETFs, explores what's driving investor sentiment in the third quarter and how ETF strategies are adapting to shifting market dynamics.

[00:29:42] Tuesday, as return to office momentum builds Steve Buller, portfolio manager of Fidelity Global Real Estate Fund, joins us to share his outlook on how evolving work trends, interest rates and geopolitical uncertainty are reshaping the landscape. Monday and Tuesday's shows will be presented in English with live French interpretation.

[00:30:00] Then on Wednesday, on the heels of the Jackson Hole Economic Symposium, fixed income institutional portfolio manager, Christine Thorpe, provides your analysis of the marquis Central Bank event and outlook for monetary policy. Thanks for joining us. I'm Glen Davidson. Take care.