FidelityConnects: The road to 2026 – Policy trends and market movers

[00:03:26] Pamela Ritchie: Hello, and welcome to Fidelity Connects. I'm Pamela Ritchie. Policy debates are intensifying as the U.S. heads into a pivotal election year. Early market movements are already reflecting shifting political expectations. How much influence might the 2025 off-year elections, state, gubernatorial, really have on investor sentiment, and which legislative signals should we be watching through 2026? Happy to say that joining us here today to break down what these policy shifts may mean for markets is Fidelity Director of Quantitative Market Strategy, Denise Chisholm, and Fidelity Vice President of Digital Advocacy and Policy Communications from D.C, Greg Lowman. Great to see you both. Welcome, Denise and Greg. How are you?

[00:04:10] Denise Chisholm: I'm well. It's great to be back.

[00:04:14] Greg Lowman: Hi Pamela.

[00:04:15] Pamela Ritchie: Delighted to have you both joining us. You guys actually speak a lot in other forums together to get sort of a policy and market side. We're glad to have you here on Fidelity Connects so thanks for your time.

[00:04:27] Denise Chisholm: This is not our first rodeo together.

[00:04:31] Pamela Ritchie: Let's begin with a little bit of news that's come out. Denise, we'll go to kind of the data picture and and Greg, I'll ask you to perhaps span out the discussion of the halt to data through the government shutdown. We did get initial jobless claims out this morning, sort of benign, nothing really to report it seems, Denise, but just sort of put it into context for data coming out and what it means for the economy at this point.

[00:04:53] Denise Chisholm: Alan Greenspan used to say that that was his number one indicator to look at because you get it on a weekly basis. It's not quite as revised as non-farm payrolls which have been more revised this cycle because of the decline in terms of survey participation. Yes, to your point, initial jobless claims were fairly benign, which means that we have a pretty weak employment picture but it doesn't seem to be weakening more rapidly. It's steady state from that perspective. As much as we were in a blind spot with the economic data in some ways I think there was a lot of data that the Federal Reserve still had. Even when you look back historically you do have to remember that non-farm payrolls were always heavily revised. As much as the Fed says that they're a data-driven institution, they are but they also have their forecasts as well that they rely heavily on. It's that dual mandate of yes, they need to focus on inflation but they also need to focus on jobs. Then it's also about that debate on what neutral interest rates actually look like if we are drifting towards neutral.

[00:05:54] I think that those are bigger debates than the data items themselves. Always remember, when you think about using payrolls or using jobs as an input to your investment process in terms of whether or not you should buy or sell equities, payrolls are statistically a lagging indicator. What you want to look for as to whether or not payrolls will get better or worse is corporate profitability. That has still been strong. If you had to bet one way or the other if this job picture will get better or worse, not over the next one week, two months but over the next year, you would look at the statistics and say, well, because corporate profitability has been so strong and still has tailwinds you would bet on job growth prospects getting better rather than worse.

[00:06:39] Pamela Ritchie: Greg, you spend much of your time discussing things on the hill with people in Washington. What is sort of the discussion of the shutdown's over, the data has been released again, happy days to an extent. What's shifted though just on the data front within the shutdown? Things have sort of changed. We've marched on without it, do we need it? What's the discussion?

[00:07:03] Greg Lowman: Generally speaking, I think folks need it and want it. That was a historic shutdown of almost 43 days. Anyone you speak to doesn't want to repeat that but there's a very high likelihood that we could find ourselves back in a dataless government world at the end of January in 2026 where appropriators are running up against fast moving deadlines towards the holiday season and then how quickly January is going to come at folks to get the rest of the appropriation bills completed from the Senate, move them to the House of Representatives, conference them, come to some agreement, and pass a government funding bill for FY '26. It's just amazing that the progress is just not there, largely as a result of a lot of hang-ups around health care subsidies expiring, the political realities of 2026 and many other partisan factors.

[00:07:55] We could find ourselves looking for data in the forest again in the end of January. I think the shutdown, I'll leave it to economists to determine what was lost. Generally speaking, I know listening to Denise enough you don't want to make investment decisions based on shutdown volatility but one thing we've noticed is particularly at the regulatory agencies. You pause work for 45 days, call it, and things line up in the queue. A lot of things get delayed when it comes to some of the more arcane regulatory relief and areas we're seeking with a friendlier regulatory climate in Washington. That's something that's sort of impacted at an institutional level, not something I think you'd want to invest on but something in the business to business world we're facing as far as regulatory priorities being held up in a pretty significant way when you take people out of work for a month and a half.

[00:08:52] Pamela Ritchie: Let's go there. Let's talk a little bit about the regulatory framework, in theory, the One Big Beautiful Bill's new foundations that have been built. It's part of, I think, Denise, what you argue going into 2026 will make sure that there's wind in the sales for equity markets. It's not the only piece but it's one of them. Just talk a little bit about that and what that piece of the policy picture brings to 2026.

[00:09:19] Greg Lowman: The One Big Beautiful Bill beyond extending what was the Trump Tax Cuts and Jobs Act, his first bite at reconciliation when he was first president to lower individual rates, those needed to be extended. That was really the engine alongside the fact that the debt ceiling was going to be reached this past summer that really drove Republicans to coalesce in unprecedented speed, signing that bill into law, surprising everyone in Washington really by July 4th. You have to remember how quickly those first several months of power when you run Washington works with the Trump administration and his Republican allies. His ability to whip his caucus into line and get that through is something that's sort of eroding every day here as we get closer to 2026, just how quickly the political magic dust shifts underneath your feet. He was able to do it and pass this significant tax reform bill beyond those individual rates, stuffed with a lot of policy in there, a lot of stuff that eroded EV tax credits and stuff that was in the Biden administration's Inflation Reduction Act, but also a lot of things that improved capital expensing and depreciation which we've already seen play out in the market, particularly around a lot of the CapEx spent on artificial intelligence and the ability to earn cash quickly off those capital investments.

[00:10:47] Beyond that you've got interesting policy that's emerged around things like youth savings accounts, what's referred to as Trump accounts. There's been a lot of news on that front this week with respect to Michael Dell committing to contribute roughly $6.2 billion into 25 million American accounts. That's a pilot program that would start newborns saving in America from 2026 to 2029. It's something the industry's looking at closely because we know a pilot program won't remain a pilot program  for long if it's successful. If there's a President Newsom or Alexandra Ocasio-Cortez or Wes Moore or President Vance, that program will likely change and in very interesting, uncertain ways.

[00:11:36] Alongside that, he obviously provided a lot of his campaign promises around overtime and seniors and no tax on tips and a variety of other credits that I think will emerge more and more in the markets in '26. A lot of people are talking about sort of the bump from that law being fully implemented going into '26, which I'll defer to Denise on those cycles. The One Big Beautiful Bill, as it gets implemented is, I think, going to create a lot of tax benefits, certainly on the individual side and then also from a corporate perspective going into the new year.

[00:12:14] Pamela Ritchie: It's fascinating. Denise, I'll ask you to just sort of pick up on some of those pieces. You bring a lot of data and incredible analysis to everyone joining you here about where we are not necessarily in a cycle but what corporate profitability looks like going forward and how you measure that. You take a look sometimes at the wage story, the underlying economic story. Again, just link the One Big Beautiful Bill to some of those pieces, the corporate profitability, the ability for corporations to pay people, to keep wages up, at least, if not growing. Just bring sort of that policy piece into the corporate profitability story.

[00:12:53] Denise Chisholm: That was the most important part of the bill from a statistical or historical perspective, the drop in the corporate tax rate. It wasn't a drop in the statutory rate but it was a drop in the effective rate, almost to the tune of 7 percentage points. When you look at this historically, and you can measure it on the statutory rate or the effective rate ex-recessions, and you will come up with the same results. You do see very clear durability of earnings growth in year one and year two after those tax cuts. Again, if you sort of step back and say, okay, let's look at history, what usually happens in year one you see a boost in terms of CEO confidence, check the box, we just saw that. We did see a boost from recessionary levels. Then you see the durability of real GDP growth and earnings growth into that second year. If you're thinking about the cycle, I always think of 2022 as the ultimate low of the cycle because as much as it wasn't a recession it was either a very hard soft landing or a very soft hard landing but I think we landed because real wages were negative, in some ways very typical of a recession.

[00:13:55] The stock market contracted 30%, which was right in line with median recessions. And we had a corporate profits recession of about 7 to 10%, which on top of inflation sort of checked the box from a nominal earnings recession perspective. We didn't see massive declines in real GDP and we certainly didn't see any decline in the unemployment rate. So we almost had a full employment recession. But ex that weird quirk of the cycle I do think a lot of the contraction in 2022 set the stage for the beginning of what could be a 10-year earnings durability and GDP cycle. So going into 2026 you say, well, are we at the end, are we at the beginning? Is there anything that can shift the odds to make this more durable? I think we have a trifecta of tailwinds, one of which you mentioned, which is the One Big Beautiful Bill Act to say that it usually cements durable earnings growth. We also have a more friendly Fed in terms of cutting rather than on hold or hiking. We also have that decline in energy prices which is usually related to inflation, which is also usually related to corporate profits. I think we have a lot going into 2026 to suggest this earnings recovery is, in fact, durable, which justifies the current valuations we have and makes it very likely that we remain in the secular bull market.

[00:15:15] Pamela Ritchie: Fascinating. With that durability, with that grounding, with that sort of concrete footing to an extent for certain parts of the market, Greg, how will Trump, the administration, the players, the Republicans that are in charge do walking into 2026? It sounds like an awful lot of foundation has been laid for 2026 to go well. That said, it seemed like the Tennessee election recently was, you know, pretty close.

[00:15:43] Greg Lowman: Right. I think there's this K-shaped feeling in the country. We talk often in our industry about the markets and we're all lucky enough to be well employed and generally doing well economically. Those are the circles, you know, we sort of are in a tunnel in because Americans are struggling and there's a real affordability issue that you've seen in some of those races, Pamela. I think there's sort of a dual lens economy where you see these record valuations in the markets but, generally speaking, a lot of concern around new hiring, potential layoffs down the pike and then just sort of growth. There's not really a clear picture. It's reaching all companies, call it, in the S&P 500. What that means going into 2026 I think is being reflected in some of these early election data points we're seeing in this last election in November and most recently just this week in Tennessee. These are off-year elections, right? These are elections for governors, there are special elections for House seats that come up where people retire or step off or other roles, as well as some local municipal elections that really go down ballot in states and don't rise to the national level.

[00:16:55] Going back to those races in early November and then just the one this week, going to the November one was really a Democratic romp as it relates to the two governor seats in New Jersey and Virginia really going past expectations there. As you looked at those results come in, I'd say sort of colloquially down to Mississippi dogcatcher but not far off. Democrats were overturning sort of local council seats where they hadn't been overturned in several decades. Clearly, the pendulum seems to be swinging. It has given Republicans, particularly in the House of Representatives and some in the Senate who are up for election next year in' 26, in the mid-term elections, a lot of pause and consternation.

[00:17:43] That question of yes, the economy, the markets seem to be chugging along really flies in the face of what they're seeing on the ground with their voters that are continued to be unhappy with inflation and the cost of living. You certainly saw that ... I mentioned the governors' races, obviously, top of mind on that race I'd be remiss not to point out was the election of a 36-year-old explicitly declared socialist Democrat in Zohran Mamdani in New York City. All these point to a lot of heartburn for Republicans going into a mid-term which, historically, over the last 63 years has only been retained in the House of Representatives control by an incumbent presidency party twice. One of those times is after 9/11 so you can understand that sort of unique aberration.

[00:18:31] Just this week, in that Tennessee special election, which everyone had their eyes on in U.S. political circles, Matt Van Epps, the Republican, won his seat. Fine, clear as day, Republican retained a very ruby red district, but he only won it by 9 points. That still seems like a good margin. Trump won it by almost 25 points, no more than 11 months ago. What does that mean? Those margins seem to be closing. I think Republicans, when they look at the board have sort of PTSD as it relates to elections when Trump is not on the ballot. You look at the 2018  mid-terms when he was in power they got shellacked, and in 2022 when they were seeking power in a Democratic controlled Washington didn't make the gains they thought they could. Without him on the ballot there's a lot of concern that low propensity voters will not show up and that the Democrats will be coming out in force on a number of issues they feel like the country's headed in the wrong direction on, across immigration, the economy and just general tone and tenor. This is all shaping up to what does the White House do and the Congress to get at this affordability crisis in '26, which I know we can touch on more.

[00:19:49] Pamela Ritchie: For sure. I wonder if we can go to health care, which is one of the massive stories within the shutdown and how that works. There's a little bit of a tale of two cities in terms of the investment thesis for health care. I know, Denise, within the sectors that you're looking at health care is not quite as bad as it was, and there are a few reasons for that. Not all of them are policy but some of them are. I wonder if you can speak to the sector itself and then we'll talk a bit about what needs to happen sort of within the health care care realm more on sort of the entitlement side of things.

[00:20:23] Denise Chisholm: When you look at the data, the fundamental data, you say, okay, the stocks are cheap, Denise, does that help? Not really by itself. Okay, the stocks are underearning, does that help, is there a mean reversion trade? Not really by itself. But the two together, the stocks being cheap and being in bottom quartile earnings growth, that provides you some optionality. You do have sort of a linear relationship between those two things and the odds of the sector's outperformance on some sort of mean reversion trade. Now, I will say that this is not something that I would say is secular leadership. You have seen a revaluation down on relative price-to-sales, relative price-to-book, and certainly relative forward earnings as being justified by the fact that health care as a sector is just not as profitable as it once was.

[00:21:15] When you use historical data you can say, well, history is the same, what are the patterns and when do the patterns change? The patterns very clearly changed for health care in the early 2000s where EBIT margins or operating margins or even net margins were essentially going up from the ;60s to the early aughts and then from then had flatlined and now turned down. So health care used to be offence and defence and now it's very much a defensive sector, which means that it tends to outperform only when the market goes down. I am seeing a shift. Again, I think that there's some optionality. You always ask me top three sectors and bottom three sectors. For a long time health care landed in the bottom three. I would say that is no more because of this sort of change in the probabilities and maybe on some policy deals. I'm always understanding of the fact that remember, when we had health care reform in the '90s that was supposedly one of the worst set-ups for health care from a fundamental perspective. Actually, it was one of the best setups for the stocks because valuations trough.

[00:22:21] You always have to be careful trading on headlines. We have seen some shift in probabilities but when you think of, okay, what do I want to do from an investment perspective, you've heard me talk about technology as leadership, do you want to sell technology and buy health care? No. I think that technology is still leadership, it's a better place of new capital right now but if you had to stack in terms of those bottom three, I know you have a lot of Canadian investors that are interested in energy, if you had to think about one sector to potentially sell to fund your health care purchases I would pick energy. If you're looking at me from a shift perspective think about how you should be thinking of it in terms of trading your portfolio. I think energy still looks worse than expected, even though I dusted off all the data and says there is any mean reversion trade there. No, I don't see it in the data but health care I do see it in the data.

[00:23:13] Pamela Ritchie: Really interesting, and again, sort of looking out to 2026 and the landscape there. Greg, take us through, I mean, the idea is that they're sort of trying to take apart and re put together the Affordable Care Act and nobody really knows how to do it. What will happen, I guess introduce us to what they're attempting to do right now with health care and and sort of what the short term, medium term looks like there.

[00:23:38] Greg Lowman: The beauty of a complicated private health care system and all its quirks. I know that speaking to a more simple system in Canada this can require some context, which is these Obamacare subsidies. The idea of providing tax credits to roughly 20 million Americans, 14 to 20 million Americans, who required them during tough economic times around COVID to purchase exchange, Obamacare exchange related health care. They were a temporary program set to expire on January 1st of 2026 or December 31st of 2025. Like anything in Washington bills get passed on a temporary basis to fit in a tight budget window but they're popular policies and so they often get extended. It's a bit of a gimmick. Here we are while they expire thinking, oh, who would vote against continuing to extend health care credits for folks so they can afford it? Well, they're running up against that reality that that's likely to lapse. There will be a vote in the Senate next week that's sort of a messaging vote that was promised to the Democrats to reopen the government. I don't think that's going to garner enough votes to pass the Senate. Certainly, not enough Republicans to bring that across the line and meet that threshold of 60 votes to get past the filibuster.

[00:25:00] In the House of Representatives you have a a a real issue with Republicans in particular who do not want to see their constituents health care costs rise but also have this reflexive reaction to doing anything to continue to bandaid Obamacare into the out years here where ultimately these subsidies would cost over a 10-year window $350 billion over 10 years. It's not sustainable, really. I think you know anyone objectively would tell you that it's not sustainable to keep bandaiding the subsidies to pay for the Affordable Care Act, aka Obamacare. Certainly in the short term everyone's wrestling with this looming election, the impact it's going to have on 20 million Americans losing coverage, having costs increase on that coverage. Those notifications have already gone out from health care providers that that will happen. The rubber will actually meet the road in the new year where they will have to pay for that.

[00:26:04] We're down to a deadline here that looks like it's going to get passed over, that just doesn't seem to be enough time on the clock because the President really hasn't involved himself as aggressively in the deal making. He's floated other health care accessorized policies that certainly a lot of us, including Fidelity, are market leaders in like health savings accounts. They're not the silver bullet to a broader health care reform conversation. That was sort of the surprise of this year, all of a sudden we have a health care debate on our hands. No one really has time for it. That's plays into that affordability question, Pamela, and I think will ultimately come down to the voters in '26.

[00:26:46] Pamela Ritchie: Affordability, as you say, is probably gonna be the centrepiece, or certainly looks like it's gonna be one of the centrepieces for 2026. With the time that we have remaining, Canadians very concerned about trade, no surprise there. Just want to get your broad strokes, Denise, going into the tariff discussion. There is IEEPA, we understand they may get the revenue from somewhere else if tariffs don't work out. Greg, love you to follow up on that and sort of the broader trade strokes that you can provide, maybe some of the players involved there and what that means. Denise, if IEEPA IPA changes, if it doesn't, what do you think of that revenue going into the coffers? Is it gonna come some other way? What do we need to know about trade at this point and tariffs?

[00:27:30] Denise Chisholm: Greg can probably talk about it better than me but I think when you look at Supreme Court rulings there tends to be more nuance associated with them than yes or no. The truth is that the administration has a lot of other options for rebuilding that revenue. There are at least three other sections, and I can't remember the numbers, that they could put on in one of them almost the same day. Yes, you would have the 15% cap in terms of tariffs and it would only last 150 days unless ratified by Congress but that's an option that is within the Constitution for the administration to turn on day one. In some ways it starts to make it look like a little more expected or more like actual policy as opposed to a back and forth. Is it 30%, is it 15%, is it gonna be 10%, what does this look like? Those sort of options of Section 282 and the other sections might actually look like more cohesive policy that does generate revenue but is in line with what we've seen, or maybe even a little less, that tends to look like more cohesive policy. You'll still see a decline in uncertainty as we approach 2026. Anybody who's followed uncertainty from a stock market perspective, from a signalling perspective, high uncertainty is usually something to be bought because the second derivative move is usually, yeah, it doesn't get certain and you might not like the answer but it gets less uncertain through time. That might be yet another tailwind into 2026 even though tariffs are likely here to stay.

[00:29:00] Pamela Ritchie: Fascinating. Greg, what do we need to know on this front? If there's a shift, if there isn't, what is the discussion?

[00:29:07] Greg Lowman: I really think Denise did an excellent job of summarizing what's at stake here. It's interesting just as a nugget aside on this tariff conversation, there's a a must-pass bill called the National Defence Authorization Act. As part of that there's sort of this bipartisan rallying cry to include further sanctions on Russia. In doing that it gives the president authority to levy tariffs and some executive control over trade as it relates to Russia. It flies in the face of what they don't want, which is more power and control in the executive branch. They want to cede that back to, this is the Democrats in particular at this current moment, cede that back to Congress where historically it's laid. That's just a fascinating nugget that here you are, you're trying to push for world peace and sanctions with Russia and Ukraine and use Congress's leverage with the National Defence Authorization Act to get that through but, oh, darn, that's gonna give the administration more trade power. It's not something we want that could influence the Supreme Court's ruling in a matter of weeks, months. We'll find out at the latest June of '26 but I think we'll see that soon. As Denise mentioned, there's many other paths they'll take.

[00:30:26] I think another uncertain element in this whole trade debate is all these promises from countries of these massive investments in the United States, where where that bears out. I think direct stakes in companies as well as part of this engagement, sort of this White House Oval Office dealmaking that the country's never really seen before. A lot more to come as it relates to where that all settles in the marketplace. I think you'll see that emerge in '26. It's been this flurry of executive orders and unilateral decision making, but it'll settle somewhere. I think we'll get further clarity on that in the coming months.

[00:31:04] Pamela Ritchie: And maybe even a breather, either of you?

[00:31:08] Greg Lowman: That would be nice.

[00:31:10] Pamela Ritchie: It's wonderful to see you both. Wish you all the best for the holiday season ahead. Thank you for joining us on Fidelity Connects.

[00:31:16] Denise Chisholm: Thanks so much, Pamela.

[00:31:18] Greg Lowman: Thank you.

[00:31:19] Pamela Ritchie: That's Greg Lowman and Denise Chisholm joining us here today. Coming up tomorrow, we're gonna wrap up the trading week with institutional portfolio manager, Abhijeet Singh, on emerging markets. He is going to discuss how he's navigating some key themes shaping global markets from technological disruption to shifting geopolitical dynamics and what is top of mind for investors as we head into next year.

[00:31:39] Then we go to Monday. Fidelity Director of Global Macro, Jurrien Timmer, will be back with for his latest macro outlook and to set you up for the week of trade ahead. Jurrian's webcast will also feature live French interpretation so do join us in other official language on Monday.

[00:31:53] Next Tuesday you can join us for an exclusive conversation with Louis Têtu. He is former CEO and current chairman of Coveo, a pioneer in AI-powered digital experiences. You don't want to miss this opportunity to hear from one of Canada's most influential tech leaders on the strategies and the breakthroughs defining the AI era here in this country and how it can add value to your practice. Thanks for joining us here today. We'll see you soon. I'm Pamela Ritchie.