Denise Chisholm: Sector watch – December 18, 2025 (REPLAY)

Denise Chisholm, Director of Quantitative Market Strategy, brings her unique insights and perspectives on the sectors to watch in global markets.

Transcript

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Hello and welcome to Fidelity Connects.

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I'm Pamela Ritchie. Payroll data remains noisy

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and is of course backward looking, but leading

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indicators from small businesses are taking a

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leg up. That matters because small business hiring has

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historically led shifts in the job market.

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At the same time, the Fed looks supportive, but maybe

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not reactive, a backdrop that's often been constructive

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for markets. Our next guest says, this combination

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could mean that 2026 looks better than investors

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expect, particularly for undervalued sectors

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like financials.

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So does this shift change how we should be thinking about

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jobs, rates, and sector opportunities?

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Joining us here today to walk us through what data might

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really be saying, and we need to be listening to, is

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Fidelity Director of Quantitative Market Strategy, Denise

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Chisholm. Warm welcome to you. Denise, how are you?

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Hey, I'm very well excited for the holiday season.

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It's around the corner. It's wonderful to see you probably

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the last time Fidelity Connects before the new year.

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So we'll have you help us wrap things up.

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I mean, there's been a lot of data out this week, but here we

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go with the inflation numbers in the U.S.

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Final count before the next Fed decision looks

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okay.

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Yeah, it looks better than we thought, right?

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So coming into the year, it's interesting, the median dot

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from the Fed on inflation was 2.8%,

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right? So this is core inflation, and core inflation just

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came in on a year-on-year basis at

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2.6. So it's interesting despite the fact

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that we saw tariffs obviously in mid-year and Liberation

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Day and yet there was no change in the deceleration.

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Now there is some angst over whether or not this is distorted

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and there was enough of a sample size so we'll certainly have

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to see in revisions but if you look at the data it looks

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like you know it's all kind of on trend so it's the

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ultimate irony I think in the market that despite the that

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some of the prices in the CPI went up

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as a result of tariffs, we have seen a top.

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Quartile deceleration.

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In inflation over the last year and the 25%

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of the time that happens when you look out over the next year

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what does that monotonically lead to usually higher stock

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prices led by those economically sensitive sectors

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like technology consumer discretionary and financials where

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defensive sectors tend to lag which is exactly what we

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saw this year which I do think looks very very

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likely based on the inflation data and all the other data we

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can talk about looks likely to repeat into 2026.

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So you're too elegant to say I told you so, but I'm going

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to say it for you that you have been saying that this is

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likely the direction that inflation is going for a very long

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time. I mean, months. We go back to last year even, and

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when the rate cutting cycle began back in September

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2024.

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However, there have been many, many voices of noisiness

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within this, but you sort of quite clearly said it looks like

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it's on track. For continuing deceleration.

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And here we are. I wonder if you can just remind us a little

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bit about what you saw months ago.

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Yeah, well it's not really me. I mean it's in the historic

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data. When you look at every time we've instituted tariffs,

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you have seen a deceleration in inflation.

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Which means that if you think about the logic of it, you

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know, and hold everything else constant, it's true.

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Some prices will go up.

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The question is, will those prices going up infect all

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of the broader prices and will you see a broader

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acceleration? And the answer to that historically is no.

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And I think the answer is more like what we've talked about

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over the last couple of months, which is tariffs act like a

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tax. So if you pay more for one set of goods, then you don't

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have the money to pay for the other set of good.

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And therefore that marginal propensity to consume declines

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and the pricing power that corporate America ultimately sees

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declines as well. So it doesn't really distort

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the overall trend.

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Again, I think that always the message for investors is as

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much as look, it is fun to do sort of hold L SQL and see

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which parts move and which parts are meaningful.

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But the more you do that, the more I think that you sort

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of blur the lines in terms of what the actual

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signal is.

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And yes, did it raise some prices?

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Absolutely. Will it raise all prices and change the

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trend? What you've seen historically is no.

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So it's not really me, it's more that I think

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that the data in history is usually throwing the

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correct cautionary flags to investors over wait,

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wait, don't hold all SQL, let's look to see if this has

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been a significant variable and history can show you more

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often than not some of the things that you think are very

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significant aren't at all.

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So fascinating. So even before today, the couple of

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things that were giving an outlook for 2026 in

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your mind really were sort of the rate story ultimately.

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And tell us what you've been seeing in job growth.

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There's sort of a couple of thing that go together that again

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come back to a bit of a durable recovery I think as you've

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always put it. But what was lining up even before today's

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numbers for 20 26?

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We've talked about the fact that jobs are a lagging

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indicator, so if you're thinking about what do I think about

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the job market and then should I use that in my investment

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thesis to add to equities or subtract from equities, you can

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be led astray, meaning that bad payroll reports usually

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beget good market conditions because the stock

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market has already discounted it.

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And as frustrating as that is, that happens over and over

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again through time, but when you think about that, I think

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it's important to put together the leading indicators, why

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that could be wrong. We've talked about other leading

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indicators in terms of CEO confidence and the fact that

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median earnings are now finally joining the party after

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the better part of three years.

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And now we have a confirming signal in the small business

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survey. And that's really important.

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Because as much as small businesses are only one portion

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of jobs, and most people are employed by larger companies,

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they actually move the needle quite a bit on the marginal

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employment. And more importantly, they have been

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the laggards this cycle.

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So small businesses, at least according to ADP, is likely in

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contractionary territory.

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While large businesses are still hiring.

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So it now looks like we are seeing the small business

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survey say, hey, all of a sudden my intentions to hire

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over the course of the next year are higher.

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We've seen a top-decile move in that inflexion.

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Again, looking back to those historic relationships, where's

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their signal, where's there noise?

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You're finding signal, the bigger the acceleration in

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that intention to hire, the more likely it is that the

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unemployment rate is lower or the job growth is higher.

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So, I'm not saying that the unemployment rate is going to go

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down necessarily. I do think that we're in a complicated

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cycle that I still call off cycle.

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We had a full, what I would call full employment recession in

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2022 and now we're having a full employment recovery.

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So it's not going to feel like other quote recoveries

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because not a lot of people lost their jobs.

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It would be different if corporate America actually laid off

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in 2022, but they didn't.

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So we're at a better position in terms of the durability of

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jobs, but it's going to grow strongly.

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But when you look out in 2026, if you're angsty about whether

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or not jobs are going to be...

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Better!

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Into 2026 or that we are just going to continue this

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slow slide and maybe into a recession or maybe we have

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already even been in one and BER might look back

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and say that there was actually a contraction but it looks

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to me like the data suggests that it's actually going to be

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better into 20 26 and you have the Fed on your side

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which raises the odds that NFIB or the

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small businesses will hire in the future.

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You also now see them more profitable than they've been and

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when the two are combined, you actually have 70-75%

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odds that you will see payroll growth in small businesses

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over the course of the next year, which is now being

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confirmed in the survey.

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So I think we have a nice sort of statistical though,

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which of course is not perfection.

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I can't obviously guarantee you that there will be employment

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growth, but it does look like a lot of things are stacking up

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on one side to suggest it's better, not worse, into

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2026. And one of the.

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Sort of reasons for things stacking up, or I'd ask you to

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put it into context, is the rate environment.

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So we've had this cut from the Fed.

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In theory, small businesses, when rates come down,

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and there's also been some wonkiness with rates actually

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coming down for those businesses to borrow at

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lower rates. But it looks like there is a

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landing for that to happen, for them to

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borrow and therefore hire, ultimately, because they're

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expanding.

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No, that's exactly right. And in that survey, in the NFIB or

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small business survey, you see that the rate that they are

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showing the survey that they're borrowing at is finally

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starting to come down.

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And that wasn't to your point up until this point.

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So, and it gets back to something that we've always talked

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about, which is the Fed cutting is important.

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But it's more important that they're cutting because they

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can, not because they have to.

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So in that environment, that's usually negative for small

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businesses, and in some ways, any businesses, if they're

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coming because they have to, they're usually sort of

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following the cycle, not necessarily creating the cycle.

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So to the extent that inflation is coming in lower than we

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expected, even after tariffs, then the Fed

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can continue to normalise policy lower, and maybe we're going

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to see one or maybe two cuts next year after the three

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cuts that we've seen this year, and that translation

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mechanism will translate into the durability

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of employment growth and the durability of profit growth into

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2026, which I think is sort of the definition and

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the underpinning of the secular bull market that looks likely

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to continue.

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We'll go into some of the sectors that are perhaps more

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of interest or less of interest, but that durability comes

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back to this sort of discussion of the everything else

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trade for US stocks, other than the hyperscalers,

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essentially.

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And this fits into that.

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I mean, this is one of the underpinnings of everything else.

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I think that's right. So the one thing that I would say is

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I've been a big sort of,

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I've said before that I do think that the market is going to

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broaden. I think there are many strategists

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that think it's going to rotate, meaning that you need to

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sell your technology stocks and buy the other, you know,

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493 or buy every other sector.

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That part, I'm not there.

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I think that technology looks like durable leadership to me.

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I think their fundamental underpinning of future earnings

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growth is very, very strong and valuation does not dissuade

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me because it has not been historically predictive.

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Now that said, when you look at sort of the sector map, and I

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don't know exactly where we are today, but as of last, I

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think Wednesday, technology and communication services were

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the only two sectors that were actually being the S&P 500.

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I expect it to be more broad than that into

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2026. And I do think that there's been some broadening

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points throughout the year in 2025.

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So it hasn't been, you know, just a technology market the

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entire year. I think that that there was some shape shifting

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along the way. And I think there will be more shape shifting.

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The question that I get all the time is, well, where is the

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second best place to look?

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And for me, the interesting part is now, again, re-ranking

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the three sectors that I'm continually talking about where I

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see opportunities and I have seen opportunities over the last

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couple years, technology, consumer discretionary and

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financials. I think financials has taken a couple clicks up

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yet again.

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Here's the reason behind that.

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Financials in the Russell 3000, and I didn't look in the S&P

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500, but I was just doing a deep dive on the data.

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And this note will come out in a couple weeks.

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So I worked on it, but then tomorrow's note is gonna be on

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inflation. So I wanted to get that out.

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But in a a couple of weeks, you'll see the note on

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financials. And the interesting part is, in the Russel 3000,

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three out of the four last years, financials

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actually outperformed, right?

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So they have outperform, and in the bulk of the first

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quarter, they've outperformed. But if you look over really

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the last four years, they've essentially been dead money.

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So it's almost like being a trading range and when they get

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sort of too high, you maybe potentially want to sell them.

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And then when they go too low, they usually provide an

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opportunity. What I see in the data is entirely

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reflective of almost exactly that, which is

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to say that valuation when they get to bottom decile levels

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really does have a very strong risk reward.

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And it's been true in every five year increment, even

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since the financial crisis.

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So, I think valuation shows you a really, really

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strong risk reward.

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So I do think, yes, financials have gone nowhere, so you

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can certainly say, well, Denise, you weren't right, there

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wasn't a lot of upside, but there also wasn't a lot a

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downside either.

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So for me, that seems like it's a really strong

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call option on a continual basis.

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Can I guarantee you that you're going to see something like

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tech performance?

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No, but I do you think it's really good spot to park

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a lot capital given that minimal downside risk

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that I see statistically in the data supported by valuations.

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So just over the past couple months earnings have been

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strong. The stocks have been weak.

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We're back down to bottom decile valuations.

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I think whenever you see that, you have to sort of take it a

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couple clicks up and park some capital in financials.

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And the interesting part is when you look historically,

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that's been a really strong negative correlation with the

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technology sector. Now look, don't confuse negative

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correlations with the fact that if technology outperforms,

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financials have to underperform.

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The correlation I'm talking about is just a slope of the

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line. So in the last, I think, eight years that technology

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has outperformed, which is most of the time, financials have

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actually outperformed four of those years.

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So again, it's not exactly negative, it's just the slope of

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the lines. But when you look on a go-forward basis, when

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you're coming from this negative point, a correlation usually

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do see over the course of the next year, both sectors

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outperform together. And I think that that negative

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correlation is almost like a of fear for financials

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like, oh, this is not going well.

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And I think that that provides investors an opportunity to

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actually add to positions to protect in terms of downside

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and you always have the call option of look maybe

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deregulation will stimulate earnings growth and maybe

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you'll finally get some valuation expansion along

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with the durable earnings growth that we've already seen.

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So financials as we approach 2026 look

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to be even more interesting.

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They always seem like a little bit more interesting at the

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end of the year for that first quarter pop.

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But again, I do think that it's kind of durable from

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that perspective. I think that you want to own financials as

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a sector because the downside is fairly limited

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when valuations get to these levels.

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So if you're looking for a negative corollary to technology

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stocks, I think it's an opportunity.

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Fascinating.

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And then where does- No.

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Amazing. And therefore, consumer discretionary

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fits where, would you say, now number three?

14:36.280 --> 14:39.560
Number three, rate sensitive for sure,

14:39.560 --> 14:42.520
but ironically less rate sensitive than technology.

14:42.520 --> 14:45.680
And that's partly around the fact that technology has had a

14:45.720 --> 14:48.040
better secular margin trend.

14:48.080 --> 14:51.200
So whenever you see disinflation, or I wouldn't call

14:51.200 --> 14:54.280
it deflation, but disinflational trend, you usually get

14:54.320 --> 14:57.400
multiple expansion. You get multiple expansions most in

14:57.400 --> 14:59.360
the place where there is strong profitability.

14:59.400 --> 15:02.640
And that has been more technology than it is

15:02.640 --> 15:06.160
consumer discretionary. So, at this point, when you look at

15:06.200 --> 15:09.480
a disinflationary trend and you say rates coming down,

15:09.520 --> 15:12.320
that's actually better for technology stocks than it is for

15:12.320 --> 15:14.560
consumer discretionary. But look, we talked about home

15:14.600 --> 15:17.200
builders months ago and they've either gone nowhere or

15:17.200 --> 15:19.800
underperformed. I still think that they're an opportunity.

15:21.200 --> 15:24.240
Hello, investors. We'll be back to the show in just a moment.

15:24.240 --> 15:27.600
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DialoguesFidelity podcasts available on Apple, Spotify, YouTube, or wherever

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

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It's fascinating, so you mentioned consolidation.

15:57.120 --> 15:59.680
It's sort of like they're on the side, they're fries on the

15:59.680 --> 16:02.880
sides. But so what you mentioned is the

16:02.880 --> 16:06.040
case for it, but deregulation, there's a rate

16:06.040 --> 16:09.240
cycle going on as well, which I mean, you used

16:09.240 --> 16:11.920
to argue that higher rates can help the banks out because

16:11.920 --> 16:14.120
they can charge more for their loans.

16:14.120 --> 16:16.280
So I was just gonna ask about those two macro things, the

16:16.280 --> 16:19.360
consolidation potential because of deregulations and the

16:19.360 --> 16:22.720
rate story for banks slash financials

16:22.720 --> 16:23.720
broadly.

16:24.200 --> 16:26.480
I think when you look at the rate story, because of the

16:26.480 --> 16:29.120
corollary between rates and growth, it does sort of muddy the

16:29.120 --> 16:31.520
waters. Do I want higher rates? Do I lower rates?

16:31.520 --> 16:34.480
When you look it statistically, you want a steepening yield

16:34.480 --> 16:37.720
curve. So, that is more or less, I think, what's

16:37.720 --> 16:39.200
predictive of the banks.

16:39.200 --> 16:42.440
And when you look, you know, when you actually get Fed cuts,

16:42.440 --> 16:45.600
you get 75% odds that the yield curve does tend to steepen.

16:45.600 --> 16:48.080
And that's back on the, wait a minute, I don't understand, so

16:48.080 --> 16:50.320
if the Fed's cutting, you mean the 10-year goes up and that's

16:50.320 --> 16:53.560
a good thing? It can be for banks because they borrow short

16:53.560 --> 16:56.760
and lend long. So that has been a better setup for them

16:56.760 --> 16:59.120
historically. Now, we're only, I think, when you look at the

16:59.120 --> 17:02.200
three months. Versus the 10-year, I think we're only at 50

17:02.200 --> 17:05.360
basis points, when the peak yield curve has been

17:05.360 --> 17:08.480
150 to 250 basis points when you look

17:08.480 --> 17:11.600
at the range. So we're nowhere in terms of steepness,

17:11.600 --> 17:14.800
but if you saw something like more rate cuts and more

17:14.800 --> 17:17.800
growth along with it, you would get a steeper yield curve,

17:17.800 --> 17:19.320
which is beneficial for the banks.

17:19.320 --> 17:21.960
So I think that that's what you want to keep your eye on.

17:21.960 --> 17:24.640
We did have a steepening trend when the rate cycle started,

17:24.640 --> 17:26.800
and it's been flattened out year to date.

17:26.800 --> 17:29.400
Wouldn't surprise me if that steepening trend picks back up

17:29.400 --> 17:31.200
into 2026.

17:31.240 --> 17:34.440
And as to your point on consolidation and

17:34.440 --> 17:36.840
better profitability associated with that consolidation,

17:36.840 --> 17:38.960
which you would expect, I think that that's all a call

17:39.000 --> 17:42.120
option. Would I say that you would

17:42.160 --> 17:43.520
need to bet on it?

17:43.520 --> 17:46.040
I would say that the valuation data that I'm looking at says

17:46.040 --> 17:48.840
you don't have to bet on it. But if it comes to fruition,

17:48.880 --> 17:51.520
that means either the stocks are even cheaper because they're

17:51.520 --> 17:53.800
going to be more profitable or earnings growth is going to

17:53.840 --> 17:56.960
more durable than you expect because deregulation.

17:56.960 --> 17:59.200
Fascinating how those fit into it, but are not necessarily

17:59.200 --> 18:00.760
the base case for it.

18:00.760 --> 18:03.120
They're sort of the extras.

18:03.120 --> 18:06.480
Take us through the discussion of, so productivity is

18:06.480 --> 18:08.080
a little bit of a nebulous term.

18:08.080 --> 18:11.040
We know ultimately it means good things and it means an

18:11.040 --> 18:13.400
economy is more efficient ultimately.

18:13.400 --> 18:16.600
We're also hearing the term AI used by central bankers

18:16.600 --> 18:19.440
around the world. This morning Christine Lagarde in the ECB

18:19.440 --> 18:21.040
comments was mentioning.

18:21.040 --> 18:23.560
AI and the good things that it's going to do for Europe,

18:23.560 --> 18:26.400
ultimately. This is being sprinkled through Fed speak.

18:26.400 --> 18:29.480
I don't know to what extent that's the most useful thing

18:29.480 --> 18:32.720
to unpack or just the productivity if you can take us

18:32.720 --> 18:36.280
there because we all know it's good for us.

18:36.320 --> 18:38.840
We all know there's lots of different ways to measure it.

18:38.840 --> 18:41.560
What might you point us in the direction of to watch for on

18:41.560 --> 18:43.280
this front if it's so hard to measure?

18:44.480 --> 18:47.280
Yeah, I think when you look at productivity cycles over time,

18:47.280 --> 18:50.160
like the boom time that people usually talk about is the late

18:50.200 --> 18:53.360
90s, when productivity growth as measured by the Fed,

18:53.360 --> 18:56.440
which is both labour and capital, was growing above, I

18:56.440 --> 18:59.680
want to say I think 4%, which means that you can have

18:59.720 --> 19:02.760
higher growth with lower inflation, because you are more

19:02.760 --> 19:05.920
productive per worker and per capital use.

19:05.960 --> 19:08.520
I think there's a lot of optimism around AI.

19:08.520 --> 19:11.400
We'll see. I don't think that it's been in the, in the data

19:11.440 --> 19:14.800
yet, um, you know, we'll see how that evolves.

19:14.800 --> 19:17.760
But I think when we break it down and say, okay, let's talk

19:17.760 --> 19:21.360
specifically about labour productivity, there

19:21.400 --> 19:24.520
seems to be angst that we do not have enough

19:24.560 --> 19:27.720
labour supply potentially in the United States

19:27.720 --> 19:29.760
to fuel our growth.

19:29.760 --> 19:32.160
And when you look at that over time, I mean, this is not

19:32.160 --> 19:34.560
exactly productivity as they measure it in terms of labour

19:34.560 --> 19:37.320
productivity. But if we're breaking it down to say, how can I

19:37.320 --> 19:40.200
make sense of this and how can I understand it as a consumer

19:40.200 --> 19:43.000
of economic data and then translate it to what I think about

19:43.000 --> 19:45.760
stocks and what I think about the economy going forward,

19:45.760 --> 19:48.920
labour force was flat pretty much, you

19:48.920 --> 19:51.560
know, for the last 25 years before COVID.

19:51.560 --> 19:54.600
Right. So oh, to essentially 2020, there

19:54.600 --> 19:57.960
was almost zero labour force growth and

19:57.960 --> 19:59.920
GDP grew the entire time.

19:59.960 --> 20:02.280
Now look, it wasn't particularly productive.

20:02.280 --> 20:05.440
It wasn't 1990s style productive, but I

20:05.480 --> 20:08.280
think that the angst around, well, what if the labour force

20:08.280 --> 20:11.760
doesn't grow? Is this a problem either that

20:11.760 --> 20:14.920
means that we can't grow, well, that would refute that,

20:14.920 --> 20:17.720
or I think more importantly, if the Labour Force doesn't

20:17.760 --> 20:20.800
growth, does that mean at the already low unemployment rate

20:20.800 --> 20:23.680
that we are gonna see a wage price spiral and wages will

20:23.720 --> 20:27.120
spike? And I think that that is erroneous as well,

20:27.120 --> 20:30.360
because the unemployment rate has very little correlation to

20:30.360 --> 20:33.280
wage growth, which is why you see right now we have a very

20:33.280 --> 20:37.640
low unemployment rate, but wage growth is decelerating.

20:37.640 --> 20:40.760
So in some ways, the deceleration in wages is telling

20:40.760 --> 20:44.240
you, you need less supply to actually

20:44.280 --> 20:46.680
have positive real wage growth.

20:46.720 --> 20:50.040
So I'm not necessarily sure that a declining

20:50.040 --> 20:53.160
supply in terms of labour growth would lead to wage inflation

20:53.160 --> 20:56.360
so much as it would probably lead to a wage stabilisation

20:56.360 --> 20:58.040
that we actually need.

20:58.080 --> 21:01.120
It's a little bit like OPEC and oil prices.

21:03.000 --> 21:04.640
I'm not sure I understand that comparison.

21:04.680 --> 21:05.880
I'll ask you about that. Okay.

21:05.880 --> 21:08.480
Yeah, yeah, okay, but I was just going to say no.

21:08.480 --> 21:11.000
So I think there there are people say, okay Well, the Permian

21:11.000 --> 21:14.040
is shutting in in production that means that you know oil

21:14.040 --> 21:16.200
prices are going to spike because people are declining supply

21:16.200 --> 21:18.960
No, that's what they need to do.

21:18.960 --> 21:20.680
They need to stabilise pricing

21:20.680 --> 21:22.320
Right. Right.

21:22.320 --> 21:25.560
So on the supply question, because it's certainly

21:25.560 --> 21:28.680
a political hot potato, where people are coming

21:28.680 --> 21:30.960
from and not coming from and so on, and are there enough

21:30.960 --> 21:33.560
people left for jobs.

21:33.560 --> 21:36.120
But as you say, I mean, one of the things we also heard from

21:36.120 --> 21:39.320
central banks recently is that it was sort of

21:39.320 --> 21:41.680
a tough medicine, prices are not coming down.

21:41.680 --> 21:43.680
Like the grocery store is not going to get cheaper.

21:43.680 --> 21:47.280
It's just not. And therefore prices will remain and

21:47.280 --> 21:48.760
what will ultimately...

21:48.760 --> 21:51.720
Happen within the economy of central banks and lots of other

21:51.760 --> 21:54.800
entities come together is people will earn more

21:54.800 --> 21:57.360
to catch up to those high prices at the grocery store, for

21:57.400 --> 21:58.400
instance.

21:59.280 --> 22:02.280
But to do that, you need some scarcity in the labour supply.

22:02.320 --> 22:03.480
Is that, I mean, is that right?

22:04.720 --> 22:06.320
I think that's exactly right.

22:06.320 --> 22:08.680
Well put together. Yes, I think that that's exactly right,

22:08.680 --> 22:12.120
the best way to solve the affordability crisis is

22:12.120 --> 22:14.760
actually through time. You really don't want to solve it

22:14.760 --> 22:17.040
through price, right? We could I mean, the Federal Reserve

22:17.040 --> 22:20.160
could hike rates to 10%, we could go into depression,

22:20.160 --> 22:22.000
and that would solve your pricing problem, but it would

22:22.000 --> 22:24.400
create a whole lot of other problems and wouldn't solve

22:24.400 --> 22:26.400
purchasing power, which is what you want.

22:26.400 --> 22:29.400
So what's the best way to sell purchasing power, make the

22:29.400 --> 22:31.520
economic expansion durable.

22:31.520 --> 22:33.520
And that's going to take some time.

22:33.520 --> 22:36.160
So the affordability problem is not going to be solved in

22:36.160 --> 22:39.000
2026. It might not even be solved by 2028.

22:39.000 --> 22:42.080
But if income grows over time and you restrict

22:42.080 --> 22:45.440
supply to allow wages to grow over time,

22:45.440 --> 22:48.000
it will eventually solve itself.

22:48.040 --> 22:50.280
Amazing. There's a couple of great questions here.

22:50.320 --> 22:53.040
So just go back to financials, which you were talking about.

22:53.080 --> 22:55.720
Are there financial subsectors that are more interesting than

22:55.760 --> 22:58.160
others? You mentioned the banks, but obviously it's a big

22:58.200 --> 22:59.200
sector.

22:59.560 --> 23:02.280
Yeah, so financials overall is interesting because they have

23:02.280 --> 23:05.680
bottom decile valuation, but they have above 50 percent,

23:05.680 --> 23:07.840
the 50th percentile ROEs.

23:07.840 --> 23:09.600
Banks are a little bit different. They're definitely bottom

23:09.600 --> 23:12.280
decial valuation, but they're not quite above.

23:12.320 --> 23:14.640
Your usual profitability.

23:14.640 --> 23:17.760
So I do think that that puts them in more of the

23:17.800 --> 23:19.840
trade, not secular hold.

23:19.880 --> 23:22.960
Capital markets and brokers and all

23:23.000 --> 23:26.040
of those sort of tied to what I would call the market

23:26.040 --> 23:28.800
cycle, that tends to look better over time.

23:28.840 --> 23:32.040
You have valuation on your side, yes, definitely not as cheap

23:32.040 --> 23:35.280
as banks, but the returns and the operating margins and

23:35.280 --> 23:37.360
the structural fundamentals and the businesses have been

23:37.360 --> 23:38.680
better secularly.

23:38.680 --> 23:41.800
So, I still see that as an opportunity, which Not to

23:41.800 --> 23:44.440
say that at this point, I do think banks got back down to

23:44.480 --> 23:45.880
bottom decile evaluations.

23:45.920 --> 23:48.960
So I think that there's a good opportunity for capital there.

23:49.000 --> 23:52.040
But I usually tend to add to things like brokers

23:52.040 --> 23:53.680
and capital markets as well.

23:53.680 --> 23:55.360
Okay. Fantastic.

23:55.360 --> 23:58.240
Ask me if you can speak to a little bit of a comparison.

23:58.240 --> 24:01.360
This isn't always your wheelhouse that you're happy with, but

24:01.360 --> 24:03.400
the question is about U.S.

24:03.400 --> 24:06.440
Stock valuations versus the global markets, Europe and Japan

24:06.440 --> 24:07.440
as examples, yeah.

24:08.520 --> 24:10.840
We're expensive, they're cheap, and that has not been

24:10.840 --> 24:12.360
predictive historically.

24:12.360 --> 24:15.960
What you have seen is a structural derating outside

24:15.960 --> 24:19.240
the US because there is less earnings growth

24:19.240 --> 24:21.480
cycle to cycle outside the U.S.

24:21.520 --> 24:24.720
So I do think that this was an opportunity if you

24:24.760 --> 24:27.840
own international stocks to trim that position

24:27.840 --> 24:30.680
going in because what we're seeing right now is technology

24:30.680 --> 24:34.320
and the U.S. Stock market overall has re-accelerated

24:34.320 --> 24:37.280
to top quartile earnings growth at the same time where

24:37.320 --> 24:41.080
everybody outside the United States is decelerating

24:41.120 --> 24:43.480
again in terms of earnings growth.

24:43.480 --> 24:46.800
Might it be different this time because Europe

24:46.800 --> 24:48.400
is investing in defence.

24:48.440 --> 24:51.440
Maybe. But so far, we are not seeing that

24:51.480 --> 24:54.840
in the data. I'm not seeing any difference in terms of

24:54.880 --> 24:58.080
the differential between the median US company

24:58.120 --> 25:01.280
and the median European company to suggest that is

25:01.320 --> 25:04.360
the case. So if that's not the case going forward,

25:04.400 --> 25:07.480
then what you would expect from a historical perspective is

25:07.520 --> 25:10.640
to see continued derating between

25:10.640 --> 25:12.760
outside the US and the US.

25:12.760 --> 25:15.960
So I think that US leadership is intact for

25:16.000 --> 25:16.960
2026.

25:17.000 --> 25:20.040
So stocks follow earnings and earnings are perhaps

25:20.040 --> 25:21.960
done what they can do globally.

25:22.000 --> 25:23.720
It goes down the other side potentially.

25:24.960 --> 25:26.680
Right. That's exactly right.

25:26.720 --> 25:29.440
Let's finish off with a couple of thoughts just on inflation.

25:29.480 --> 25:31.080
It's what you're going to write your paper on for tomorrow.

25:31.120 --> 25:34.280
It's the numbers that we got out today, essentially what

25:34.280 --> 25:37.520
the Fed has to, I mean, not to make it

25:37.520 --> 25:40.040
too playful, but to play with ultimately, like they don't

25:40.080 --> 25:42.560
have to, you can sort of imagine Jay Powell going,

25:46.240 --> 25:49.560
One last thing, yeah, exactly.

25:49.600 --> 25:52.640
So implications for the Fed and central banks and really the

25:52.680 --> 25:55.680
story for the economy based on this inflation report, if we

25:55.680 --> 25:56.960
can just kind of finish out that way.

25:58.120 --> 26:02.000
Yeah, there was a lot of angst over will the Fed be,

26:02.000 --> 26:04.640
will the fed have the will to potentially resist an

26:04.640 --> 26:07.520
administration that is either demanding lower rates.

26:07.520 --> 26:10.680
And now I think that that whole conversation, I

26:10.680 --> 26:12.680
don't wanna say it goes away, but it's definitely

26:12.680 --> 26:16.280
dramatically lessened because the data supports

26:16.280 --> 26:18.840
the Fed cutting rates.

26:18.840 --> 26:22.000
Inflation is coming in lower than they expected and may

26:22.000 --> 26:25.440
continue the deceleration as we enter 2026, Which

26:25.440 --> 26:28.560
means that the Federal Reserve can on the data lower

26:28.600 --> 26:29.960
the rates because they can.

26:30.000 --> 26:31.560
Not because anybody's asking them to.

26:31.600 --> 26:33.440
Not because anybody is demanding that they do.

26:33.440 --> 26:35.120
Just because they can based on the data.

26:36.160 --> 26:36.760
Fantastic.

26:36.760 --> 26:39.920
We wish you a lovely holiday season with your

26:39.920 --> 26:42.880
family and we look forward to seeing you in the new year.

26:42.880 --> 26:45.640
Denise Chisholm, thank you for sharing your thoughts and data

26:45.640 --> 26:48.360
and interpretations with us.

26:48.360 --> 26:50.920
Yeah, great to be here all year. I'll see you next year.

26:51.760 --> 26:55.680
Thanks for watching or listening to the Fidelity Connects

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Denise Chisholm: Sector watch – December 18, 2025 (REPLAY)

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