FidelityConnects: 1:1 with Fidelity’s Andrew Marchese, Chief Investment Officer

[00:04:16] Pamela Ritchie: Hello, and welcome to Fidelity Connects. I'm Pamela Ritchie. Resilience in the face of a once-in-a-century tariff shock has been a defining theme in the markets this year. While company earnings worldwide have held steady the key question for investors is what is this fall and into 2026 going to look like? How will tariffs affect companies going forward? How will they impact different countries and companies and asset classes differently? Today we're going to be taking a closer look at how the tailwind of artificial intelligence is being balanced against some of these headwinds and where opportunities may lie for you and your clients in the months and years ahead. Joining us for a conversation on the state of the market is Andrew Marchese, Fidelity portfolio manager and Chief Investment Officer. Andrew leads a high performing team of over 100 investment professionals including portfolio managers, research analysts, traders and more, and manages over $100 billion in assets. This entire discussion with you, Andrew, a warm welcome to you, will be also in live French interpretation. We welcome everyone here and welcome you. How are you?

[00:05:22] Andrew Marchese: Thank you, very well, yourself?

[00:05:23] Pamela Ritchie: I'm very well. Delighted to be here in September, and it's a little more than back to school what we're going to talk about today. Do send your questions in for Andrew for the next little while. Let's talk a little bit about the state of the markets, what we have seen and, really, ask you why the resilience is here. It does seem, even after a wobble of a few days, we're still climbing.

[00:05:46] Andrew Marchese: Through my lens I think ... you always point to a couple of things in the pillars of investing. One, we'll talk about earnings and two, we'll talk about interest rates and liquidity and lastly, valuation. On the earnings front, we came into the year where on the S&P 500 earnings forecast was for about 12% growth. As we know we kind of walked through the tariff announcements, Liberation Day on April 2nd. Shortly thereafter forecasts on Wall Street went from about 12% to about 6.8% at the lowest. Tariffs, the can got kicked down the road a little bit, some delays, some got ratcheted down. All in all now, earnings forecast is for about 9% earnings growth on the S&P 500, which actually isn't so bad and actually in line with history. We were talking off camera about typically every year you start the year kind of almost too optimistic. Those numbers get ratcheted down a little bit but going from 12% to 9% growth, if indeed the 9% turns out to be true, isn't actually so bad and is in line with history.

[00:06:53] I think what has kind of catalyzed the leadership off the bottom, April 8th, the U.S. has actually kind of taken over. Everybody was talking about rest of the world, it's actually been the U. S., and more specifically, the Mag Seven, or large-cap growth. I think that really dovetails with fiscal policy, so Big Beautiful Bill, and then the market quickly turned to Fed independence and just talking down interest rates. The administration has been talking down interest rates since April and it's gotten louder every week that's transpired since about Liberation Day. The market's looking forward and pricing in the fact that, okay, maybe the tariffs do slow down the economy to a degree. And that is actually happening, it's showing up in economic numbers. For those out there who have heard me speak before, I've talked at length about cycles aren't what they used to be. There's not these boom-bust cycles that we've seen historically going back many decades.

[00:07:58] Pamela Ritchie: Is that good for investors?

[00:08:00] Andrew Marchese: I don't know if it's good or bad. I think it is what it is. You never get too far away from, if we use 50 as the barometer for PMIs and service PMIs, you get a little above 50, a little below 50, but you never boom-bust. Aome people would say that's actually a good thing. Now, what it does do, which makes investing a little bit more tricky, is you have to be a little more attuned to where the leadership may come from. I think because you don't have those conventional cycles, which were a little bit more predictable around what a recessionary cycle looks like and what sectors or factors lead at various points during that investment cycle, because you do not have those clearly defined cycles anymore it makes leadership a little bit more blurred so we have to point to other things. Also, the financial industry in general is changing. There is far more financial engineering with ETFs, factor-based ETFs, smart beta. There are more decisions being made in investment in equities for non-fundamental reasons. We have to be attuned to all that.

[00:09:14] Pamela Ritchie: There's so many things I want to pick up on there, the interest rates, the liquidity piece, the Fed, the leadership, but actually let's go to that discussion about, really, AI is where you're going with that. I mean, this is a societal change that we're thinking about and as it represents within the markets themselves it's a financial engineering story, really, isn't it? AI is sort of part of that but financial engineering has gotten to the point where big funds are moving money around in a way where you're not single stock investing really very much anymore.

[00:09:47] Andrew Marchese: It's a falling share of the total investment pool, that's how I would kind of phrase it. So if you go back to the '70s, '80s, even the '90s, there were decisions being made to invest in securities, buy and sell securities, that largely came from a fundamental perspective so you kind of went down, bottom-up, forecasted out future cash flow and profits, made some kind of assessment about what the interest rate backdrop should be, the discount rate you should use and then invest accordingly. Those how the large, large majority of decisions were made. As we got into the 2000s, the advent of quantitative investing, and that's further matured and evolved over the last two decades.

[00:10:34] The financial engineering, you talked about ETFs, you can get exposure to factors, whether it's momentum or yield or low volatility. You can invest thematically. If you think AI is going to be a big thing, you can't quite quantify it but you want a basket of AI levered securities whether it's things like the picks and shovels of it or businesses that will benefit in the future from a cost perspective, productivity perspective, we can bundle that for you. That, by definition, with all that financial engineering, people are making decisions on investing in securities which drives the marginal price of the underlying stock, the price itself of the single stock, for non-fundamental reasons.

[00:11:22] Pamela Ritchie: Up or down.

[00:11:22] Andrew Marchese: Before, in the '70s, it was all fundamental, now it's not. You have to understand that, I think, in the context of investing. It also allows you to have more opportunities to invest and build your portfolio from a total portfolio perspective, a fund-to-fund perspective, create offset risks through low or negative correlations in your portfolio. I think it's all a good thing but when you're looking at single securities you have to understand that the marginal setter of price isn't what it used to be 50 years ago.

[00:12:02] Pamela Ritchie: That's so interesting. Along with the many, many things that you do in managing billions and billions and billions of dollars, you're also the head of the research side of things. How does it change research?

[00:12:16] Andrew Marchese: There is a axiom in investing that stocks do follow earnings. That won't change. If the profits aren't there then eventually the price has to reflect that. That won't go away. What I think it will do is that in the short term it causes aberrations in price because if there are factors that are pulling on the demand for security, right, it's all a case of supply and demand sometimes, too. More people want to buy a security it goes up in price, if less people want to buy a security it goes down in price. In the short term if there are more forces at play that are acting in a different playbook from convention, as I said like 50 years ago, then in the short term it may cause aberrations in price. From a research or fundamental perspective you have to understand that and say, well, maybe we should take some risk off because price is being abnormally reflected. The price is too high for this.

[00:13:16] Pamela Ritchie: Is there a question in here when we're talking about resilience of markets, we're seeing markets hang in there, doing okay through all kinds of geopolitical and monetary and other situations. Is it actually they're hanging in there because of some of the aspects that you're talking about? Is there strength in what you're talking and maybe not being able to see the signal as well? I mean, there might be a little bit of both there.

[00:13:40] Andrew Marchese: I think, one, there's a lot of money in the system. Again, for those on the video who have heard me speak before, since about 1987 we've gone into injecting incremental amounts of liquidity into the system without really taking the same amount out.

[00:14:00] Pamela Ritchie: Isn't that what interest rates were supposed to do over the last year and a half, two years?

[00:14:03] Andrew Marchese: Right, and it worked for 2022 because inflation got a little out of hand, raised interest rates but where are we today? We got inflation back down to ... I think not goal levels but a lot better than it was in 2022. You think about it, in the '90s we had currency crisis, that was treated with more liquidity. Raised interest rates kind of snuffed out the NASDAQ bubble of 2000 but then interest rates got cut, built a credit bubble, had the global financial crisis. What was the remedy? More liquidity, QE. That happened for the next decade. You got to COVID. What happened? Liquefied the system, actually, of quantum's higher than what you had in the GFC. So you've never taken the money away. There's a lot of money sloshing around in the system.

[00:14:54] Now you have, this year in the U.S. you have fiscal stimulus. You probably have monetary stimulus to come if you believe the administration, and they've been very transparent about wanting about 150 basis points of rate cuts from this standpoint. There's a lot of money on the system. Back in the COVID years I talked about there is no alternative. When you've got interest rates that low it pushes you out on the risk curve so you're more willing to take on risk. That boosts the prices of risk assets because you can't, and you shouldn't, stay in cash. The ramifications of that are an evolving story. It's a book with many chapters and we're going to go down these roads with a lot of this money kicking around the system. Prices will fall and rise and so on and so forth and then we'll have to deal with it accordingly.

[00:15:41] Pamela Ritchie: At the moment ... you mentioned leadership earlier and how we're very much back to where we started the year. It's the Mag Seven and a lot of that money is aimed at them in terms of investment money and also in terms of the companies themselves are deploying it into the economy with what they're spending on the AI buildout. That must be good, ultimately, not just for investors but when you think about the speed when there's that much money to put at something it goes to those winners. What about the rest of the stock market?

[00:16:13] Andrew Marchese: It's interesting when you put it like that. I'm getting flashbacks from 2000 because the same thing kind of happened with the internet. There were winners on the buildout space. We remember companies like JDS Uniphase and Nortel and WorldCom and EMC and Dell and Cisco.

[00:16:32] Pamela Ritchie: Ancient history now.

[00:16:33] Andrew Marchese: Right. It was all a hardware, picks and shovels discussion. The real beneficiaries of the internet were the software companies and businesses that grew. Google was not a company in 2000, or if it was it was probably like a shingle, it was an idea. They're one of the top five beneficiaries of the internet buildout but in 2000 we talked about everybody who was building the internet. The internet destroyed the department store, single-handedly destroyed the department store. The question for us as investors is if AI turns out to be as good, if not better, than what we are dreaming of today what industries change and benefit from a profitability standpoint, what industries go away? I think if you talk to a hundred people you'll get a hundred different opinions on that. Nobody really knows.

[00:17:27] That's why it's so exciting. I think it's really exciting because we're at the forefront of major, major change that's going on. I think the biggest risk to equities is AI actually turns out to be a dud, which I don't think is going ... but I think that would be the thing that would alarm everybody because there are a lot of decisions, hopes, being made on what the future will look like from a productivity perspective, a growth perspective. You talked about the capital coming into the system which is generally good for the economy. That, to me, is the biggest risk to equities.

[00:18:05] Pamela Ritchie: That's really interesting. I mean, so when we saw Nvidia come out with their earnings there was sort of that bated breath moment, and we did see a reaction and so on. When you say a dud do you just mean it's commoditized?

[00:18:19] Andrew Marchese: No, I don't mean that necessarily, I just mean the productivity gains don't reach our expectations.

[00:18:26] Pamela Ritchie: Okay, so it's not that just DeepSeek could do it cheaper.

[00:18:28] Andrew Marchese: No, no, no, no. That's a very specific investment consequence of investing in very specific AI-related companies. What I'm thinking of more is it changes the way we live, we work. It makes certain companies growth go in a hockey stick fashion. I'm not talking about the people who are building it, I'm talking about industries that never had it, will use it  and all of a sudden the spectrum of outcomes becomes great for these businesses, particularly a lot of white collar businesses, health care. What does it really mean in the quantums that our future GDP kind of realizes because of it.

[00:19:17] Pamela Ritchie: As in quantum computing.

[00:19:18] Andrew Marchese: That's another aspect of it too, another specific aspect of this whole AI buildout.

[00:19:23] Pamela Ritchie: How do you, as an investor and as leading this group, how do you stay very close to it? Because the only way to sort of take part in something that you don't know where it's going is to stay very close to it. How do you and your teams stay very close to it?

[00:19:38] Andrew Marchese: The easy part, much like 2000, has been investing in the picks and shovels, those companies who are building it out and demand for their product, obviously, because of the CapEx boom, they benefit in real time. The harder part is going to be, okay, in speaking to these companies how do we plan to employ it? What level of productivity are we getting? Is it just nice to have? Is it revolutionary? Is it evolutionary? I think it's really about talking with the companies to get a better sense and comprehend how that will change their business from a cash flow, from a profits perspective, going forward. What other businesses are going to be potentially wiped out?

[00:20:28] Pamela Ritchie: It's almost like taking on a great big merger or acquisition and sort of when will it be accretive at some level.

[00:20:35] Andrew Marchese: In some ways, yeah. It's a good analogy.

[00:20:37] Pamela Ritchie: You have to sort of go with the investment up front but presumably ... in terms of industries that will be wiped out, can you tell? I mean, this is sort of a printing press moment. It does get discussed like that.

[00:20:53] Andrew Marchese: Exactly, buggy whip. I think it's too early to tell. We all have our guesses and it may not even be industries that get wiped out, it's certain jobs that get wiped out within the context of that industry. Too early to tell because I don't think anybody really has a good handle on what we're dealing with here.

[00:21:17] Pamela Ritchie: We live in a country that notoriously has a productivity problem. People study it from a million different angles and they don't seem to really know why, but we do. Are you, well, to be blunt, are you bullish on Canada being able to implement this properly for sort of a national story of companies within that can work this through?

[00:21:41] Andrew Marchese: This is my own personal opinion, the productivity problems related to Canada has been in part and parcel more things related to policy, taxation and brain drain. There's probably a few other things I'm forgetting but those are the things that have to be addressed first. I think the implementation of technology will naturally happen in Canada, globally, because that's what we do as humans. We use tools and businesses will do that, but I think the greater productivity issues relate to those three things that I mentioned. I think we need to address those, and we should have been addressing them for the last 20, 30 years.

[00:22:21] Pamela Ritchie: That's sort of now is the time. There are a number of questions, Andrew, coming in here so let's put some of these. I think you mentioned gold a little bit there but here's the specific question. The strength of gold and silver, has it surprised you?

[00:22:35] Andrew Marchese: No, it hasn't surprised me. I've been on the record in the past, and people ask me, what are you bullish about, it's gold. It's hard to get more concrete than that, meaning I can't give you a price that I think bullion trades to. With all the financial, the liquefaction of the system, hard assets by default need to benefit and gold's one of them. Silver is a little bit more tied to industry but people are played against the price of gold. But it is a bit more driven from an industrial commodity complex standpoint. It's really about there is M2 money supply rising and rising and rising. It's hard to create a bearish, in my opinion, it's hard to create bearish argument about the price of bullion with all these forces still at play. If they were to change radically then that opinion would change.

[00:23:45] Pamela Ritchie: Okay, very interesting. A couple of questions here. Given the current tariff situation and downward pressure on rates do you see elevated concerns around holding U.S. sovereign debt products? Treasuries for one.

[00:23:58] Andrew Marchese: That's a good question. I think some of the concern would be at the longer end of the curve.

[00:24:06] Pamela Ritchie: That's where the rates are going crazy.

[00:24:07] Andrew Marchese: Exactly. If you think this will catalyze inflation  then yeah, you would be concerned about that. If you are of the opinion that you will get 150 basis points of rate cuts, and maybe more as Scott Bessent was on television talking about not too long ago, you'll suppress the short end of the curve. Then the speculation is would the administration, the Federal Reserve, others, have to yield curve control. So you have quantitative easing to manage the long end of the curve. That hypothesis has been adopted by many. I can tell you many people out in the financial community think that is a necessary and probable step that they will take.

[00:24:56] Pamela Ritchie: Just talk us through that. You've got a very steep yield curve, you want to control that a little bit, and QE is the answer.

[00:25:02] Andrew Marchese: You might start buying the long end of the curve.

[00:25:05] Pamela Ritchie: So you just expand the Fed's balance sheet, basically. You go back to that.

[00:25:10] Andrew Marchese: There are a litany of people out there in the investing community who believe that that step will follow if you get a lot of interest rate cuts. It would have to. That creates its own kind of...

[00:25:25] Pamela Ritchie: Japanification.

[00:25:25] Andrew Marchese: Well, yeah, it creates its own series of topics, issues, problems, discussions. I'm not suggesting it will happen but it is a possibility.

[00:25:37] Pamela Ritchie: Great question here. With U.S.-Mexico-Canada agreements what possible outcomes are you considering for Canadian equities, certainly as, yeah, so we sort of have this review coming up of the USMCA, CUSMA, whatever we want to call it. Where does the Canadian equity picture fit? Maybe it's more an industry story but...

[00:25:58] Andrew Marchese: We're not directly making kind of investment decisions in Canadian securities based on what we think trade agreements and what will resolve on that front but I think Canada will continue to muddle its way through. I think as long as the economy kind of muddles its way though you look at the banking industry in Canada, will it be fine? We have to see where PCLs go and credit goes but as long as...

[00:26:26] Pamela Ritchie: Well, they've been okay in recent earnings.

[00:26:27] Andrew Marchese: Exactly. And if you can kind of withstand this can you withstand the future? Loan growth should be okay then if you kind of get lower interest rates and change policy and maybe some forms of taxation to encourage small business and other industry, and we get buildout of businesses and industries that are more levered to the rest of the world and just not relying on the U.S. That's a pro-growth aspect, and that would be good for the banks, that would be good for certain industrial companies and sub-industries. On that front, there's a lot of potential on that front. To a lesser degree on oil, which is, obviously, the other big aspect of what we do in Canada, particularly from the TSX perspective, there is still a lot of oil kicking around. There is still lot of supply. You can always turn on the taps a little bit to raise supply if you wanted to.

[00:27:25] Pamela Ritchie: But it's there.

[00:27:26] Andrew Marchese: It's always there. It's hard to get wildly bullish about the price of crude. That was one thing that I didn't address when we talked about the economy. We talked about lower rates stimulating the economy, crude's down, what, about 10% year-to-date. If you get lower crude prices that's a further kind of kick to the economy, right? So you could walk into '26 and '27, not suggesting for a second this will happen, but you've got fiscal stimulus, you may have a fair degree of monetary stimulus coming, and if you could further drive down oil prices there's a real kicker there.

[00:28:09] Pamela Ritchie: This is part of the offset discussion to the tariff narrative and so on. There are significant offsets, as is the one Big Beautiful Bill and deregulation and tax [indecipherable]. So what's the future look like, Andrew Marchese, for the next, I don't know, year? Are there enough balances of risks that have some cover for each of them to keep going?

[00:28:34] Andrew Marchese: I think what's happened since Liberation Day and the bottom of the market on April 8th is that the market has really looked forward to some of these things, fiscal and monetary stimulus as being what will carry us through and tariffs are a one-time hit.

[00:28:50] Pamela Ritchie: Are they? That's what we keep getting told.

[00:28:52] Andrew Marchese: I think it remains to be seen. I think we've done a lot of work and a lot of historians have done a lot of work to suggest that tariffs are actually disinflationary, not inflationary. They're initially inflationary but they're actually disinflationary over time.

[00:29:05] Pamela Ritchie: Because you stop buying stuff.

[00:29:06] Andrew Marchese: Right. It hurts incremental demand for goods and services. But if your discount rate is lower and your balance sheet is good and you can take on debt at a low cost of carry then maybe you're more apt to consume at both a business level and a consumer level. Then, past one year, the holy grail is that you get into some form of technological revolution where AI or AI-like tools increase productivity, keeps inflation kind of under wraps because productivity is rising, and this is more like Utopia, you can thread the proverbial needle, right? What we talked about in the global financial crisis was there were two ways out of the predicament of the global finance crisis, generally speaking. You can grow your way out of it or you can inflate your way of it. We all, everybody, we, the proverbial we, we in the investment community said, well, there's really no growth engine that's going to...

[00:30:10] Pamela Ritchie: Inflate your way out.

[00:30:11] Andrew Marchese: So you've got to inflate your way out of it. What if, this is just a thought, AI is actually that revolutionary growth engine that kind of changes the way we do things and over time, and I'm not talking in it going from here to here in a year, I'm talking over like a couple of decades, you've changed the way we work, live and so on and so forth, and you can suppress inflation, productivity gains are huge, it catalyzes other changes in policy and how we think about employment, how we think about wages, all of this, how we think of health care and the cost of health care, all this kind of stuff. That's what threads the needle. That's, as I said, that's kind of Utopia.

[00:30:55] Pamela Ritchie: But it is probably the goal of the U.S. administration, is that fair?

[00:30:59] Andrew Marchese: I don't know if they're that long dated in terms of their thoughts.

[00:31:05] Pamela Ritchie: Just a question as we head out. What would you say is sort of the biggest economic event or investment event, that we know about currently, that you would look towards? I felt like the Fed decision in September, which is still coming, was a little bit muted by the Jackson Hole comments because we got a bit of clarity on what Jay Powell was thinking. What else is out there that we need to kind of look towards, if anything?

[00:31:31] Andrew Marchese: I don't know if there's any one theme in the short term. I think for us and what we do, we're just kind of going along security by security, industry by industry, trying to pick off things that we think where earnings and cash flow are going to be greater than consensus thinks over the next two years. Why is that? Maybe the industry has really kind of lagged for the last three years and things are looking better, maybe because it's in part of an anti-momentum basket the price is really depressed, and it's far more depressed than it actually should be. I think we're looking at things like that on a case-by-case basis. A one-year horizon, I don't think there's any one theme that I'm totally...

[00:32:16] Pamela Ritchie: Smaller cap companies, a sort of everything else trade, to an extent?

[00:32:20] Andrew Marchese: I think, generally speaking, as a general statement, high level, 30,000 foot statement, particularly in the U.S. They're a direct drive on the health of the U.S. economy. What has transpired over the last 10 to 15 years, though, is that the winners keep taking share so the big get bigger, they get better, and that comes at the expense of smaller companies. I think depending on the industry that you're referring to, yes, some small-cap companies if the U.S. economy accelerates into '26 and '27, will benefit. Others are having their lunch eaten because the big are just going to take it anyway irrespective of what the economy does.

[00:33:05] Pamela Ritchie: And what rates do in that sense. Andrew Marchese, a delight to see you and to set us on course through September. Thank you for joining us here.

[00:33:11] Andrew Marchese: Thank you.

[00:33:12] Pamela Ritchie: That's Andrew Marchese joining us here on Fidelity Connects. Coming up tomorrow, French advisors are encouraged to tune into our full day event. This is live from Quebec City. This premier French event features Fidelity's portfolio managers, subject matter experts. If you are not attending in person please do join us online. Then for all advisors nationally at 11:30 a.m. Eastern, the regular Fidelity Connects time, will be a Quebec City discussion with portfolio manager, Mark Schmehl, and he'll be sharing his perspective on the U.S. and global markets as well as trends influencing his portfolio positioning.

[00:33:47] We'll wrap up the week on Friday with equity research analyst Robert Reynolds. He's going to  be unpacking how the auto industry, industrials are being reshaped by the ongoing U.S. tariffs and what might be next for companies in the auto sector. We'll also take a look at the aerospace sector as well.

[00:34:04] On Monday, Director of Global Macro, Jurrien Timmer, will join us to dive into the latest macro themes that are on his radar and that you should know about. He will be sharing his compelling charts, those amazing data that he helps display to help you kick off your week. That's what's coming up if you're tuning in here. Thanks for joining us here today. I'm Pamela Ritchie.