FidelityConnects: Denise Chisholm – Sector watch – November 20, 2025

[00:00:57] Pamela Ritchie: Hello, and we are back with Denise Chisholm to go through the discussion of consumer discretionary and ultimately where the consumer sits and how that fits into her sector thesis and outlook. Denise, can you hear me okay?

[00:01:12] Denise Chisholm: Okay, I can see you.

[00:01:14] Pamela Ritchie: Great, so we'll go through the discussion of the consumer, the consumer discretionary sector more broadly, but ultimately it's been in the depths. I wonder if we just sort of begin and jump right in. Consumer discretionary, such an interesting area, usually a call on the economy but sentiment has been pretty low. It's hard for anyone to figure out why they should take part in this. Is that about fair? That seems to be the feeling anyway.

[00:01:39] Denise Chisholm: Well, regardless of how you measure it, whether you're looking at the Conference Board in terms of, you know, consumer sentiment, or you're looking at the University of Michigan survey, it's almost at recessionary levels. University of Michigan is certainly at recessionary levels. The consumer is, in some ways, waving a white flag saying, you now, we are having a hard time here, which is not exactly a surprise given what the consumer has been through over the last couple of years. I mean, they saw the deepest contraction in real earnings while they kept their jobs, pretty much ever in the history of the United States, and now they're watching their job possibilities erode in front of their eyes with a slightly rising unemployment rate. All of this is around the fact that we had such a strange cycle, meaning that we actually had a quasi-recession of an earnings recession and a real earnings recession, a real wage recession for the U.S. consumer, without anybody losing their jobs. The recovery looks unique as well, meaning you're having a recovery but you're already at full employment. The job picture is not going to get massively better. It might get marginally better. I think that that's what's keeping the consumer reserved from a sentiment perspective.

[00:02:45] There's a couple interesting signals behind that. I think that most investors think, well, if the consumer doesn't feel so great then they're not going to spend. That's going to be a problem for sales, it's going to be a problem for holiday sales and it's gonna be a problem for the stocks. I've got to say when you look at the data nothing could be further from the truth. In fact, consumer sentiment doesn't really have a crystal clear relationship to spending. If it does have a really solid relationship it's only on the upside, meaning when consumers feel low they spend but they spend more when they feel better. The entirety of that R- squared is really on the upside. Just the fact that consumer sentiment is poor doesn't mean the consumer will not spend or it's going to be a bad Christmas when you look at it statistically. As it relates to the stocks, here's the interesting part. This is one of the biggest contrarian indicators out there, meaning that the worse consumer sentiment is the more likely the stocks are to be higher over the next 12 months.

[00:03:49] Pamela Ritchie: That's fascinating. I mean, do you look at that as sort of tailwinds from a piece of data, headwinds? I mean, there's a couple of different things going on at the same time and they both seem to say, don't go near here.

[00:04:00] Denise Chisholm: Yeah, so it all comes back to the fact that the stock market is a discounting mechanism. By the time the bad news is this visible more often than not, which is not to say every case, the market has already priced it in. I think that that's what you see historically. Now, the consumer discretionary sector overall has kind of been a split sector. It's lagged a lot in the S&P 500 because of the big cap technology names but if you look at the Russell 3000 on my data over the last 12 months it's actually a slight outperformer by about 100 basis points. I did have a portfolio manager ask me about that given that that's usually what I use in terms of looking at data and say, well, Denise, this consumer sentiment, it's usually a very sort of binary signal, meaning that the stocks have already underperformed massively going into that consumer sentiment low, and then because of that they can outperform coming out of that low. But if we didn't actually underperform, I mean, it seems like there's been a lot of pressure but again, in the broader market there really hasn't been from an underperformance perspective, does that negate the buy thesis.

[00:05:01] Here's the other interesting twist. The more likely the consumer discretionary was to outperform, which only happens about a third to 40% of the time, the more it likely it is to be higher over the next 12 months, meaning, it's almost like if the stocks are already up they've already absorbed some of that bad news. I do think this just goes back to the fact that the more the headlines are screaming at you about one scenario the more you have to consider as an investor if it is this public it may be priced in.

[00:05:34] Pamela Ritchie: When you say even if stocks are up are you talking about sort of broadly or just within this sector?

[00:05:40] Denise Chisholm: Within the sector, although that is true for the broader market as well. When I said that I was just talking about consumer discretionary, meaning the stocks are not only up but again, in the Russell 3000 have outperformed the Russell 3000 over the last 12 months. Consumer discretionary sector hasn't been as poor as you would think over the past year. But this is the interesting twist as well because I also had a lot of people ask me, well, isn't this strange, the consumer sentiment is at recessionary lows and stocks are hitting all-time highs. It's not really that strange in the sense that when you look at the data, again, kind of like the consumer discretionary sector, about a third of the time stocks have already been higher over the last year when sentiment is in the bottom 5% of history. If you say, well, does that increase or decrease your odds if stocks are already up you might think, well, that breaks the pattern because to make the pattern work stocks have to go down into the low and then they can rise off that low.

[00:06:35] But, in fact, it's actually higher odds, meaning that if stocks have been higher already they are even more likely to go higher. It's all of what we talk about. I mean, these signals are all related in sense that stocks actually get the macro picture right before the macro picture gets reflected in the data. It's annoying but stocks are a great leading indicator to that. As much as we want to say, hey, stocks are up a lot and the news is bad so I should take some profits, right? When you look at the data that's the exact wrong move more often than not.

[00:07:10] Pamela Ritchie: It's so interesting, you know, if it's such a contrarian measure for stocks for others, like, why do we need some of these sentiment indicators? It sounds like it's data that's collected for reasons, you want to know where people are feeling and sitting and how much money they're making, whether they're going to spend, but if it portends to the exact opposite it just sounds like a reverse psychology situation. It's contrarian. How come they sort of put this out there? Why do you gather sentiment?

[00:07:35] Denise Chisholm: Hey, it's great. If you're a contrarian indicator that's predictive I'll take it. Contrarian indicators are just as good as perfect corollary indicators. Anything that plots in a monotonic variable I'm glad they produce it.

[00:07:49] Pamela Ritchie: That's fascinating. The consumer, this holiday season as we approach it could, in fact, come out, be less on sort of the doldrums that the sentiment indicators are giving us and, in fact, spend. Is that sort of the thought?

[00:08:04] Denise Chisholm: Well, that is the thought. I think that in some ways that's the base case going into every Christmas. We always get angsty around, you know, what will it look like, what will holiday spending look like, and there are certainly some extremes, like the extreme of 2008 which sort of, again, sort of highlighted that the consumer wasn't nearly as good as we thought, and obviously the other end of that was the extreme in 2020 where the consumer was much better than people thought from a spending perspective. Most of the time there is angst and worry going in and then Santa does, in fact, come. I think that the increased angst this time came from a bunch of surveys who surveyed different quartiles of income consumers and said that the high end is intending to spend but the low end or low income or low wage growth consumer is not. That sort of gives rise to this K-shaped recovery that we're all debating and talking about. If you look in the aggregate data which is at the end of the day what stocks are reflective of, I think Bank of America just came out with their credit card survey, so far, and it's early in the holiday season, but our holiday season on credit card spend is already above the last two years.

[00:09:13] Pamela Ritchie: Really? That's fascinating. Maybe people are just getting super organized early. We don't know.

[00:09:17] Denise Chisholm: It could be. I certainly am but yes, maybe.

[00:09:23] Pamela Ritchie: Some of these indicators came out, I mean, long before Nvidia results came out last night sort of portending to, you know, on some level some people argue, all sails forward there on that front. Also we got some other consumer earnings, for instance, that look like shoppers are out, they're about, they're doing what they should be doing in terms of a consumer stock. Again, I guess just as you get these other pieces does it crystalize what you're already seeing from the indicator of sentiment being down? We're now just starting to get these pieces that help with the thesis that things are gonna be all right.

[00:10:00] Denise Chisholm: We're certainly seeing pockets of weakness but the question is whenever you see those pockets is it idiosyncratic or is it systemic? You're not seeing the data from a systemic perspective across the board like you did in something like 2008. Again, when you sort of aggregate it all up the prospect that there is current worry just increases the odds that it's gonna be better than expectations ultimately. Because as expectations fall they become easier to beat. I mean, even if you look, this is gonna be my note this week for this Friday, but it still looks from a statistical perspective that there is a big wall of worry to climb. Sentiment has backed down from an AAII perspective into the most bearish on a net perspective quartile, actually, decile than what we have historically. Again, the more bearish sentiment is the more likely the market has already priced in whatever bad news you're afraid of, and the more likely the market is to go up in your face. The same is true of VIX versus the credit spreads which we talk a lot of the time. What's the fear in the equity market versus the fear in the credit market? The more fearful the equity market is relative to the credit market the more you climb that wall of worry. That's exactly what we're seeing.

[00:11:13] In fact, if you renormalize VIX and you renormalize credit spreads and you look at the spike that we've had recently in just a 5% sell-off, I think where we are peak-to-trough, you'll see that that fear in the equity market relative to the fear on the credit marketing is bigger than the tariff tantrum. Again, for me, I'm looking at indicators that have been predictive. There will always be bad news. I think that what we have to struggle with is will this bad news be the bad news that the market climbs in terms of the wall of worry, or will it be the bad news that is systemic and leads to a much deeper and stronger and broader correction. Right now, all the signals that I'm seeing say we're back on the side of aggressive wall of worry.

[00:11:55] Pamela Ritchie: Okay, interesting. You did get these massive earnings last evening, this is Nvidia. Tech, you have been talking about for some time and done notes recently to say that, you know, the bubble talk, obviously, people have to worry about it and all that sort of thing but for you, really, this is just a leadership, an ongoing leadership situation for tech. I guess maybe just put the earnings last night into perspective. It fits right into what you're talking about.

[00:12:19] Denise Chisholm: I think absolutely. I mean, it's really interesting when you look at it. I just can't find any cohesive structural data set that says anomaly or bubble. Like I said, you can look at six or seven companies and you can look at six or seven years and you can see a hockey stick. But if you say, well, should I worry about that hockey stick in terms of CapEx or not, once you zoom out you say, oh, wait a minute, what hockey stick? There is nothing really systemically to worry about when we looked at those four charts when we spoke last. I think that that's the interesting part about technology is that the growth is so strong, that we just sort of witnessed with Nvidia's earnings, when you look at the strong growth you're actually seeing the Mag 7 on 2027 earnings ex Tesla is actually in a market multiple. That's how strong the growth is.

[00:13:07] Now, you can say, well, it's too high. Well, it's usually too high for the market and they all come down in tandem. I think that that just shows you just how strong the fundamentals are. If the fundamentals are strong then valuation historically is justified. To me, technology still looks like leadership. There's a lot of talk about a rotation and look, I think there are other things to buy, we just talked about consumer discretionary, but I wouldn't sell your technology stocks to fund it. I still think that that looks like leadership.

[00:13:39] Pamela Ritchie: On that, fundamentals, are they strong enough in the health care sector, which has been a little bit left for dead of late for lots of interesting reasons that you know far more about, but policy has been one big piece of it for sure. Has it been at a trough level, for instance, to be interesting to you yet?

[00:13:55] Denise Chisholm: Well, so that is, so yes. We talk all the time, I do have nuanced views. We don't always talk about my nuanced views, we usually talk about my tail views like, yes, buy this, these are my top three, yes, sell this, these are my bottom three. But I need to sort of tell you when things shift. From my bottom three I think I would take health care out. There are two things combined that you need historically to have a pretty decent corollary from a correlation perspective in terms of future outperformance. It's not just that the stocks are cheap and it's not just that earnings growth is poor but it's the two together because it increases your odds that you can get the dual tailwind of multiple expansion relative to the rest of the market and an earnings growth bounce.

[00:14:49] It doesn't necessarily mean you have to have both but it does increase your odds. I start to get this linear relationship between the worst earnings growth is, if you're in the bottom quartile evaluation, the higher your odds of future outperformance are. Now, they're up to 75% so this looks like a unique time for health care that's a signal that I haven't seen in quite some time. Now that said, would you want to go overweight, Denise? No. Because there is a secular downtrend in fundamentals. As much as we are at the bottom quartile of the range in terms of valuation on earnings you are seeing a secular derating of the sector on relative price-to-book, on relative price-to-sales because they have lower and lower operating margins cycle to cycle.

[00:15:36] Look, I think it's worth stepping out of the way in terms of a massive underweight here but I'm not sure that this is going to look like an outperformer or leadership at all. What I would say is, to the extent that you are interested in those defensive sectors, like to a lesser extent, certainly, consumer staples, I would put utilities in here, I would put energy in here, I would put REITs in there as defensive sectors, health care is starting to look like it's floating to the top of that list. That doesn't mean it's floating to the top of the list on my economically sensitive sectors like technology, consumer discretionary and financials but it is a shift that looks like a unique time and a unique setup.

[00:16:15] Pamela Ritchie: I think that's fascinating because you see this come more gradually than by the time a lot of us actually witness it and we're sitting within the markets themselves. You mentioned energy, you mentioned defensive more broadly, energy is an area that for quite a long time you've had a thesis that the supply story is just enormous and we just have more than enough to really make it, to make the prices of the actual energy commodity itself go up. That seems to be changing, or at least the discussion is changing because AI seems to be such a demand. Is the demand kicking in strong enough to change the supply story here?

[00:16:52] Denise Chisholm: Not yet. The biggest influence in terms of whether or not the stocks work is where they've started in terms of profitability, meaning that if they're already at above average operating margins or above average returns or above average profitability you still, even with an increase in demand you still have the potential to lose that operating margin. Remember, and this is relative to the rest of the market led by technology that's getting more profitable so on a relative basis the relative fundamentals still look quite poor despite the fact that sure, supply and demand isn't going to be nearly as bad as we thought because there is inherent demand and ultimately, I think that the best buy indicator for energy stocks is actually not good demand, it's poor demand. That's usually when it's all priced in. We saw this in 2020. That's the point where you actually want to step in as an energy investor. I'm not sure when you backtest good news in terms of an increase in demand it usually doesn't backtest particularly well. As much as, yes, it is all changing I think that there are still fundamental pressures that lead to a still very negative risk-reward in a sector that everybody is still asking questions about.

[00:18:04] Pamela Ritchie: Okay, it's too out there. What about the changing nature of some sectors? Part of utilities, and this gets talked about a lot, I'm curious to hear your thoughts, some of utilities is attached to the AI story and the pumping out of energy, specifically for data centres and so on. Not all of it is like that, which is good for most of us that wanna plug in or turn on a light at night in sort of a regulated situation. But that said, there's a changing nature of what is defensive, or is there a changing nature of what is defensive?

[00:18:32] Denise Chisholm: There definitely is in the sense that of the most classically defensive sectors, now we'll take the three that are the big ones, utilities, staples  and health care, you usually buy defensive sectors because their fundamentals hold up better when the economy turns south. Consumer staples and health care are not nearly the same, either margin expansion, margin steadiness or relative returns, but you have in utilities. Of the three defensive sectors you have seen much better fundamentals in utilities. Now, that said, it's still been an underperformer relative to the rest of the market over the last couple of years and I would kind of sell it every time it pops because ultimately it is defence. Now, there are power plays within it which electricity prices have, that's where you really see the demand outstripping supply as opposed to in the commodity of oil, right, and even in natural gas. I think that's where you see it most of all.

[00:19:31] Pamela Ritchie: Right, okay, so there's a distribution story which has to do perhaps more with the utility piece of it but the actual commodity out of the ground, not yet.

[00:19:42] Denise Chisholm: Correct, correct. Well put.

[00:19:45] Pamela Ritchie: So when does that tip? I mean, that's interesting because at some point in order to distribute it all they gotta take it out of their ground. I'm curious, how do those two follow one another?

[00:19:56] Denise Chisholm: Well, we will see because there is Moore's law. We do not know how efficient these companies are going to get in terms of the power that they need to produce. We're sitting here right now and saying, okay, we have this much power and we're going to map it out over the course of the next five years. I'm not really sure that that math is going to be linear. I'm not really sure they're going to not make massive inroads in terms of efficiencies. I think that that's a little bit dangerous to do and in some ways it reminds me, that pencilled math was how we got ourselves into the problem with the bubble in terms of, well, we need all this dark fibre because ultimately it will someday be lit. Well, we'll see if we need all this energy production.

[00:20:38] Pamela Ritchie: So as you say, not necessarily linear. Something that has been sitting, if we go back to the consumer and really back to sort of maybe a more macro picture broadly, is tariffs and the discussion tariffs. There is a changing nature, it appears, in the policy from the Trump administration right now where they are becoming ... they're being pulled off a bit, basically. Again, you've often thought that there are lots of things to offset those and that it would probably be okay. But I'm curious, just today what is your thought on the weight of tariffs on the consumer, or maybe not much of a weight of tariffs on consumer, even if they come off? Does that provide a bounce?

[00:21:16] Denise Chisholm: Yeah, it seems like we're seeing a sustained pivot, right? When they came out with the Trump tariffs initially it was about 30% in terms of a weighted tariff rate, and then it was 15, and now it's looking like 10, and it looks like it'll be less than that with the exceptions. From that perspective, I mean, you wouldn't call that a tailwind, you would just call it a lack of a headwind that we had thought, again, sort of gives you that rationale to climb the wall of worry. What does that mean? That means that inflation is likely still approaching the Fed's 2% target, which might mean that we don't have a sustained inflation problem, which means that we don't have a risk of the Fed raising interest rates, which means that the market may continue to climb the wall of worry. I do think that that's how it's pieced together. Do I think that it's going to improve consumer sentiment a lot? Probably not. I think this is going to be a tough cycle because this is the first cycle where we are recovering from a GDP and earnings perspective but we're already at full employment so it's not clear how much better it's already going to get.

[00:22:20] Pamela Ritchie: Okay, that's really interesting. If we close out just with some thoughts on the consumer discretionary side of things, again, sort of putting us straight on this K-shaped economy which we hear about all the time, or the consumer themselves, the K-shaped consumer, what would be kind of a final thought for this piece of the sector thesis that we need to remember, because it does look a bit gloomy.

[00:22:40] Denise Chisholm: I will say that when you look at the K-shaped recovery and you look at the prior past cycle what we had was a very off cycle cycle in 2022. When we saw that deep contraction and real wage growth on average the low wage consumer did the best versus the high wage consumer that we have ever seen in history. There was a flip-flop of what usually happens so some of what we are seeing now in this K-shaped economy  in terms of how bad it feels is just a renormalization. I do think that that's very much how we should think about this cycle. It's like, is it a cycle or is it just a renormalization? A lot of the pain that we are feeling in terms of that looks a lot statistically, when you zoom out, like a renormalization to where we should be on credit spreads, on delinquencies, on wage growth and on other things. So it might not be as bad as we think.

[00:23:38] Pamela Ritchie: Fascinating. Your top three you mentioned, you go with tech and then consumer discretionary and financials. Bottom three, just remind us. You said they're shifting a little bit.

[00:23:47] Denise Chisholm: Energy, staples and it would probably have to be utilities still.

[00:23:51] Pamela Ritchie: Yeah, it's still utilities. Denise, you set us straight all the time. Thank you so much for sharing your research and thoughts and time with us.

[00:23:59] Denise Chisholm: Always great to be here.