The Upside: Themes driving global markets in August 2025

[00:01:40] Glen Davidson: Hello, and welcome to The Upside. I'm Glen Davidson. On today's episode of The Upside we're looking at themes driving global markets in August 2025 with Fidelity Director of Quantitative Market Strategy, Denise Chisholm. It seems everything lately is boiling down to one big question, are we at the beginning of a new era in global trade? And if so, what might global trade 2.0 mean for you? Welcome Denise. Thanks for joining us today.

[00:02:03] Denise Chisholm: Hey Glen, it's great to be here.

[00:02:05] Glen Davidson: Denise, I'd love to talk about a bit of a behind the scenes point, if I could, to start off. You are part of Quantitative Research and Investing, QRI, as it's called. Fidelity has quantitative, technical and fundamental research all combined into a bit of a Venn diagram. You're underlying that quantitative group but you sit with the equity research associates who are the more fundamental people. Why is that?

[00:02:32] Denise Chisholm: At the end of the day we're all trying to get names into the funds that we think could produce alpha for our portfolio managers. It doesn't really matter your discipline. I mean, obviously, you highlighted the three ways that you could pick stocks. Fundamental, they talk to the individual companies, they build company models, they have recommended price targets, and then they recommend stocks based on that. Obviously, the technical staff doesn't look at any of the fundamental data but just looks at those price patterns. There's quant in the middle, which there are a zillion different ways to sort of tackle the quantitative approach. My specific approach is based on historical patterns and historical probabilities. At the end of the day that is where I sit. Equity research, where I recommend ... instead of individual securities I recommend sectors, industries, sub-industries, and I talk about the market backdrop all within the context of history. As much as, yes, every cycle is different the patterns that underpin those cycles are remarkably similar. Using those patterns from a historical perspective can make you a better investor and they can help you not fall prey to some of the pitfalls associated with data driven investing and, hopefully, can make money for our diversified portfolio managers as well.

[00:03:54] Glen Davidson: As a partner for the portfolio managers and the equity research associates it's efficient for you to be located where you are and they're coming at you all the time and you're going to them as well with ideas.

[00:04:06] Denise Chisholm: Now we operate on Teams and on Zoom so it doesn't really matter where people are. Yes, I'm pinged multiple times a day through multiple venues, people either stopping by, people wanting a quick Teams chat or people saying, hey, have you seen this data, what do you think of this data, all the time? It is a lot of our diversified portfolio managers but it's also our asset allocators. It's not only our fundamental analysts in equity it's often our fundamental analysts in fixed income. We're all sort of one big team, again, trying to figure out the same thing which is what are the best risk-rewards in the market and how can we figure that out together?

[00:04:45] Glen Davidson: Every webcast that's being broadcast seems to have AI woven through it. How does AI help you in your day-to-day?

[00:04:54] Denise Chisholm: In a lot of ways. I always say that I'm not, actually, a good writer. I like to talk a lot. I, obviously, love to do research and find the patterns in the historical data. Sometimes I've had trouble in the past in terms of writing to sort of boil it down in a way that's easily consumable. A lot the framework that I can produce can be much more succinct if I use AI as a helper. There's often times where I'll put in, what is in Denise Chisholm's brain and it'll spit out three or four options that sort of distil it in a way I hadn't really thought about before that helps somebody that maybe doesn't have the same investment acumen as either an advisor or as an analyst, that can help you sort of get across your point in terms of understanding. In some ways I use it a lot when I write and to make more succinct points. I think it makes me a bit more efficient. It certainly makes me more thoughtful and, I think, deliberate in terms of where my writings and my white papers can all be consumed into other investment disciplines.

[00:06:05] Glen Davidson: The VIX is something that you've talked about as far as often people would think, well, that's a volatility index, if it spikes all bets are off. You actually see that quite differently. Could you talk about that, please?

[00:06:17] Denise Chisholm: It's very much the opposite. I mean, you can see the patterns in the data. The higher the VIX is, meaning the more fear there is in the equity market, the more likely the equity market is to be higher over the next 12 months. You can consider it a panic index, which is not to say that there's ever good news that happens right after the VIX is, let's call it, top quartile position, say, above 35. It doesn't usually mean that you get good news and that turns the market. It just usually means that the market has fully priced in most of the bad news that is out there. Said differently, there's nobody left to sell, which is not to say that there's not any individual left to sell but for the most part the sellers have likely already sold. The next move is usually an incremental positive  which leads to incremental buying.

[00:07:02] Now, the interesting thing about the VIX is it's an asymmetrical signal. What I just told you is a high VIX tells you that there's fear in the equity market. That's usually a contrarian good signal. So Denise, does a low VIX mean complacency and does that mean it's a sell signal? No. In fact, it doesn't. Ironically, you get this weird U-shaped pattern in terms of the VIX, meaning when the VIX is complacent, let's call it, in a bottom quartile positioning I think that that's, let's call it, under 18, when it's under 18 that's actually the underpinning of a secular bull market, meaning that you usually have complacency at the point at which the market is going higher.

[00:07:45] That's often a good situation, and a high VIX is a good situation, it's usually in that muddy middle where the VIX is in a certain range and going higher where you actually see the problems associated with the market. Now, the interesting part about what I would call our leg of the secular bull market is we keep gyrating between very high VIX conditions, a whole lot of fear and boom, right back down to complacency. Statistically, you're bouncing in between the two best setups statistically for the market. A whole lot of fear that gets resolved quickly, it is usually a good complacency environment for an underpinning of a secular bull market, which I do think continues.

[00:08:26] Glen Davidson: Denise, tariffs, are they already priced into the market?

[00:08:31] Denise Chisholm: On a lot of the data I look at, I think that the answer, Glen, is yes. The interesting part about that 20% decline we saw in stocks in April is that when you look at it from a historical perspective that's basically akin to the stock market saying, I think earnings are going to contract 15%. There's a linear relationship between that. That is not at all what we have seen. When we came into the start of the year the expectations were that earnings were going to grow about 7 to 10% and then enter that almost bear market where the market essentially thought that earnings were going to contract by 15%. Not only have numbers not come down to that level but what we're seeing is a situation where in this earnings season numbers not only don't have to come down but they actually might need to come up, mainly because around the impact of the legislation that was recently passed is essentially an effective corporate tax cut.

[00:09:30] That's the interesting part of the dynamic of what I would call the math behind what essentially is the wall of worry, meaning that the stock market discounted a 15% earnings contraction so anything better than 15%, even if it's a contraction of one, even if it's 0% growth, is a positive risk-reward for the market. Not only did we see that kind of positive risk-reward but, again, it looks to me like earnings numbers are going to grow by the tune of 10 to 15% over the course of the next 12 months.  I think that not only have tariffs been priced in it looks like they might have less impact than we originally thought when they rolled on in terms of the announcements.

[00:10:17] Glen Davidson: Thank you. What are the potential outcomes of U.S. isolationism on the global marketplace?

[00:10:24] Denise Chisholm: You always have to be a little careful as an investor because so many times secular pronouncements in terms of what may or may not happen in terms of big picture data doesn't end up being the driver that you thought it was. Even if you think of something like global trade, we can measure global trade historically, we can look at it as a percentage of global GDP, and you can say, well, if I know that global trade as a percentage of global GDP is declining or accelerating or bottom quartile or top quartile, doesn't have any meaningful relationship to stocks. The answer is no, there's not any specific pattern there. You see that same non-specific pattern, or very little relationship, with deficits, debt as a percentage of GDP, meaning that there's not any consistent pattern that you bet on. So you do run the risk as an investor saying, well, U.S. isolationism must be bad, or must end up in higher prices, which then leads to a more restrictive Federal Reserve which might lead to lower stock prices. All of those factors have this sort of probability bleed where you're really making assumptions over things that don't always have consistent patterns from a historical perspective.

[00:11:38] Said differently, and that was a really nerdy answer, but said differently, that might be a headwind to equities and to global GDP growth but always remember as an investor, you're not being very careful about the tailwinds that you might be missing. More often than not there are more tailwinds than headwinds giving you a positive risk-reward from an equity backdrop perspective.

[00:12:06] Glen Davidson: Earlier in that excellent non-AI answer, because that was you, you mentioned the U.S. dollar. What does a weaker U.S. dollar mean for the globe?

[00:12:16] Denise Chisholm: The weaker U.S. dollar, it's interesting. I get a lot of questions on, you know, is this going to be a problem for equities, is this going be the end of an era as we know it? We've seen dollar depreciations many times in the past. We had the trade-weighted dollar going back to, well, whenever it started to float, 1972, and you can look at the data, we've had at least three or four big depreciations and, ironically, all of them had higher real GDP growth and then higher stock prices and higher earnings growth after it. The decline of the dollar might not necessarily be the end of what I would call U.S. exceptionalism or the stock market, the secular bull in the stock market, as we know it. Again, remember, 40% of S&P revenues is from overseas, which means that that dollar translation of a weaker dollar actually comes back into higher earnings growth and higher revenues printed in the S&Ps 500. It isn't necessarily a bad thing, and dollar depreciations don't necessarily mean the decline of the dollar as a reserve currency. Again, we've sort of seen this movie before.

[00:13:28] Now, all of that said, I'm not particularly bearish on the dollar and it's mainly around what I think is going to be an acceleration in not only U.S. GDP growth because there's going to less of that, but in U.S. corporate profit growth. The legislation that was just passed was effectively a 700 basis point cut in the corporate tax rate. That means that after-tax revenues and after-tax earnings are going to sort of be the ballast for numbers to come up over the next year. I think it's going to be hard for ex-U.S. companies to keep up in that environment. There are some estimates that say 7% is probably over the next two to three years on an annual basis going to be the increase in free cash flow growth in the technology sector.

[00:14:19] This is not something that should be taken lightly. I think we have a lot of tailwinds specifically for corporate America, specifically for U.S. stocks, which might keep the dollar firmer than you think. When you think about sort of the differential one of the biggest underpinnings to currency differentials is relative growth. If what we've seen over the last, let's call, it six months, which was U.S. GDP decelerating with the rest of the globe getting better, it could very well be over the next 12 months that that reverses.

[00:14:52] Glen Davidson: Thank you. I'd like to ask you about the great country of Canada, your thoughts on energy and gold.

[00:14:58] Denise Chisholm: Let's definitely talk about energy. No change in my thoughts on energy. I think if anybody's tuned into webcasts in the past they know I'm not enamoured with it. I think you do have a consistent supply problem. It's not necessarily the fact that certainly shale production will slow at some point, although we're not really seeing it yet. Obviously, OPEC has taken a lot of barrels out of inventory. The market's smart enough to know not to price current inventory. Even if shale production were to slow, if you saw oil prices actually spike back up into the 80s or the 90s, well, then that production would come back on as well. The problem with knowing that there's global excess supply, which is, I think, going to be a 5 to 10 year problem, if not longer, is that the market's smart enough to know that there is a ceiling. Whenever there is a visible ceiling when barrels may come back on, well, then the risk-reward isn't as unique and isn't as palatable for investors.

[00:15:56] In that way I think energy stocks are going to have a tough time keeping up with the rest of the market because their upside is potentially capped on that and we're already seeing above average in margins, which means that until we get back to normalized margins nothing even like valuation, I think, provides a really strong risk-reward. Energy is the only unique cyclical sector, or economically sensitive sector, where you get trough or very low multiples, meaning your lowly value stock on low earnings as well. I think you get that sort of double hit in energy where you don't usually get it in other places. I think because of the supply dynamics, because the fundamentals are still declining, I'm definitely on the negative side of the risk-reward for energy stocks relative to the S&P 500.

[00:16:48] Now gold, gold you can talk about in terms of the commodity, which I do think of all the commodity trends out there that is the most sustainable one, which isn't to say that I do think it's a secular play on either the debasement of the U.S. dollar or either of lower or higher interest rates, it's just got the opposite supply dynamic as oil does. From a commodity perspective it's just a better supply and demand picture. Gold miners are a little bit of a different story. I think that it's, again, going to be a tough time to keep up with the rest of the S&P 500 when you see, even with gold prices where they are, because it takes so much money to get the gold out of the ground, capex relative to sales is much higher in those gold miners than it is even in the oil patch. What you find is that the free cash flow is not nearly as good cycle to cycle. It's tough. The gold stocks don't nearly keep up with the commodity as well as you would expect because they do just burn more cash cycle to cycle than most other ventures, like say even technology. So I think gold as a commodity, plus, energy as a stock relative to the S&P 500, minus, and the same thing would be the gold miners relative to the rest of the S&P 5.

[00:18:07] Glen Davidson: Excellent. Why don't we sum up our webcast with this, what are you keeping a keen eye on for the second half of 2025?

[00:18:16] Denise Chisholm: I always keep my eye on the same thing, which is to say the credit markets. High yield spreads are the way that I sort of think about what is priced or what is potentially problematic in the market. We talked about the VIX and when there's a whole lot of fear in the equity market  that tends to be a good thing. It's even better when there is a whole a lot of a fear in the equity market relative to the fear in the credit market. The credit market, historically speaking, has been the smarter market. When I see valuation spreads, which is a quantier way to look at risk or the VIX or something like that, when I see them still be in the top quartile of their history versus the credit market being relatively tight saying, there's not really any problem in terms of defaults or solvencies over the next couple of years, we feel pretty good about that, that's usually a great setup for a continuation of the secular bull market. Most times what I'm watching is how the credit market behaves in terms of the risky behaviour that we see.

[00:19:16] Glen Davidson: Denise, very interesting as always. Thank you so much for joining us today.

[00:19:20] Denise Chisholm: Great to be here.

[00:19:22] Glen Davidson: And thank you for watching today. For more from Fidelity please head to the investor education section of fidelity.ca where you can read articles, watch on-demand videos and sign up for The Upside newsletter and upcoming live webcasts. Fidelity Canada on YouTube, LinkedIn and Instagram are also a great resource for more content, as well as our Upside and Fidelity Connects podcasts with new episodes dropping daily. Thanks for watching. I hope you'll join us again on The Upside. I'm Glen Davidson. Take care.