The Upside: Themes driving global markets in September 2025

[00:00:22] Jordan Chevalier: Hello, and welcome to The Upside. I'm Jordan Chevalier. It's all eyes on the Fed this week ahead of Wednesday's rate decision announcement. If there is a rate cut how will that cut shape the markets? Are there still tariff related challenges to come? Joining us today to talk interest rates, tariffs and dial into her top and bottom sectors is Fidelity Director of Quantitative Market Strategy, Denise Chisholm. Hi Denise, it's great to see you.

[00:00:49] Denise Chisholm: Hey, it's great to be back.

[00:00:50] Jordan Chevalier: Excellent. I think we'll kick off as the intro alluded to, we'll talk all about the Fed. Many people are anticipating that it is a cut coming, perhaps, on Wednesday. There was talk of a 75 basis point jumbo cut, seems like that's cooled. If we do get a cut how do you think that shapes the markets? Are there things investors should be looking for?

[00:01:14] Denise Chisholm: The first thing investors should know is that there's no playbook for a Fed rate cut. It always depends on the why the Federal Reserve is cutting. In some ways we're all guessing at that. We do have to sort of admit that. If the Fed is cutting because growth is contracting, not just slowing, not just slowing in the job markets or GDP, but contracting and we are approaching recession, that usually hasn't been a good thing for stocks. However, if the Fed can cut because they can recalibrate policy then that has been a very good setup for the market historically. When I look at the data that's more likely than not, meaning that the Fed can cut because they can because inflation is coming in lower than everybody thought given the onset of tariffs.

[00:02:02] The Fed could restart their policy adjustment cycle and begin those rate cuts again. Now, what you see historically is that leads to double the average market returns in history and it's usually through stocks getting more expensive. As strange as that sounds because stocks are already more expensive, you usually get it anyway given that if the Fed is on your side that usually means the economic cycle and the earnings cycle are more durable. So investors pull in those earnings ahead of time, meaning that if the Fed's cutting and the cycle's okay that usually means that's a good setup and investors aren't going to wait for those earnings to come through, they're going to price it in ahead of the time just like the stock market is the discounting mechanism that we know it is historically. In some ways the Fed cutting, if they are cutting because they can recalibrate policy, which is my base case, that's usually a pretty good setup for stocks over the next 6 to 12 months.

[00:03:04] Jordan Chevalier: You mentioned 6 to 12 months so your thinking is if rates continue to come through and it is a rate cut, let's see if this decision coming up as well as the next decision and subsequent decisions, all of that sort of supports what you're saying there.

[00:03:19] Denise Chisholm: Right. I do think that this is the Fed slowly recalibrating policy to a more normalized level. In some ways jumbo cuts like 75 basis points or hundreds of basis point cuts usually are signals or correlated with really poor economic conditions. In some ways from a historical perspective what we're looking for as investors is for the Fed to begin cutting but not by a lot, just by enough to sustain the economic cycle and create these durable earnings situations and conditions for the course of the next couple years.

[00:03:57] Jordan Chevalier: That's great. You mentioned tariffs a little bit. I know consumers here in Canada and across the border are feeling that kind of tariff pinch. Have markets priced in sort of these tariff challenges? Are we now in an environment as investors and consumers, we're okay, we have had the tariffs, things have settled and this is now the environment moving forward. Are there still additional challenges down the road?

[00:04:22] Denise Chisholm: Always be careful using sort of bad news from a consumer perspective as a reason to sell stocks. Certainly, we went through COVID and then a lot of geopolitical tensions and the biggest supply side shock and the greatest inflation shock in history and equities went up 100%. Always remember that yes, tariffs certainly cause a bite for U.S. consumers but that doesn't always need to translate into selling equities out of your portfolio. As it relates to the extent that we've seen tariffs, the impact of tariffs, I think that it's likely still to come. When you think of that still to come that might not mean the stock market needs to go down or needs to price that in. I think one of the things that investors got wrong. or economists got wrong early on was doing the math behind tariffs of 40% of the CPI in the U.S. is goods-based and of that 40%, say 30 to 40%, is imported and of that 30 to 40% that might see a price inflection of 15%. Well, that per cent and a half seems like a massive shock to the CPI but what I think investors didn't factor in is time. To the extent that tariffs just filter through slowly through the economy, and that's exactly what we are seeing and exactly why the Fed can now renormalize policy, two things happen.

[00:05:46] One, incomes grow slowly over time therefore you, as a consumer, you might not be happy about absorbing the higher prices but you can. Two, the underlying deceleration of inflation becomes paramount. Again, back to the Fed, that's exactly the situation why we are seeing the Fed be able to recalibrate policy because underlying inflation, ex those good prices, has continued to decelerate. Inflation is less of a problem now for the Federal Reserve which means that monetary policy doesn't need to be so restrictive which means they can lower rates and outside of recession that's been a boon for stocks.

[00:06:28] Jordan Chevalier: Denise, one of the reasons why we love having you here on the show is to dive into some sectors. The last time you were here you talked about tech. I think it's fair to say you were quite bullish. I just wanted to check in with you here now. Are we still bullish on tech? Have there been any updates?

[00:06:44] Denise Chisholm: We still are bullish on tech. I think that the risk-reward is still positive. As much as the sector has snapped back and outperformed substantially it still isn't as expensive as it was before we went into that April downturn because earnings have grown more than the stocks have outperformed. The setup that we're seeing from a legislative perspective in technology in the U.S. over the next couple years, technology is one of the biggest beneficiaries of the effective tax rate cut that could total about 700 basis points. That's a meaningful tailwind to earnings growth and free cash flow growth in the technology sector. So much so that even with a starting point that's a little bit more expensive than we were just talking about a couple months ago, the risk-reward is still positive. Technology does look like leadership to me.

[00:07:35] I think one of the themes that I've been writing about a lot in my notes is all the things that we worry about being sticky or higher for longer like inflation, like the Federal Reserve, I think one of the things we have to get our arms around as investors is that stocks may stay expensive for longer because all of this earnings has a whole lot of very visible tailwinds. We have the Fed now lowering interest rates outside of a recession, that's usually a tailwind. We have a seven hundred basis point effective tax rate cut for corporate America, that's a very visible tailwind. The more visible these tailwinds become the more likely stocks are to price it in ahead of time which means they might stay expensive. That doesn't change the risk-reward which is why I think technology is still leadership in the U.S.

[00:08:28] Jordan Chevalier: Looking at your bottom three sectors, and we'll get to the top three later, and that was great info on tech but looking now to your bottom three sectors, is there anywhere, any sectors that really just aren't getting it done for you currently?

[00:08:40] Denise Chisholm: Yeah, well, still energy. I always talk about energy and then utilities, which I'm actually highlighting in my meeting this Wednesday in internal asset management, and then consumer staples. Those would be my three. Energy, we can debate the oversupply issues all day but really one of the big things that keeps me on the sidelines is that 2022 was the best setup for energy fundamentals in the data that I have going back to the '60s, meaning that they were more profitable during that cycle when oil spiked than they ever have been in my database. That isn't a problem from that perspective but as it re-normalizes and those operating margins and returns and that earnings growth continues to lag the rest of the market, the risk-reward is still negative.

[00:09:25] Again, while they're overearning I think that there is caution in terms of the risk -award there because it's still to the downside. Utilities, I've gotten a lot of questions because they've underperformed over the last five to six months by double digits, by more than 10%. In some ways it's always interesting, whenever investors ask me about utilities it's usually after they've made these big moves. When they made a big move higher that usually means you want to sell them, and then when they make a big move lower that also usually means you want to sell them. Ironically, utilities have the lowest odds of any sector from an outperformance perspective and when the Federal Reserve is cutting and you're not in a recession utilities only have about 10% odds of outperformance. I think that's pretty stacked negative against you there as well.

[00:10:15] Consumer staples, I'll add in that classically defensive sector doesn't bode well when the Fed's cutting and when taxes are coming down and when earnings growth is double digits, which is historically rare when the Fed's cutting in and of itself. Consumer staples themselves is very unlike their historical data. In the '70s and '80s and certainly into the '90s consumer staples was leadership in both offence and defence, meaning that it was always a positive risk-reward because operating margins continued to increase as the companies had pricing power. That hasn't been true in almost 15 years, and the last 15 months it's been some of the worst operating margin compression that I've seen in my sector database, again, going back to the '60s.

[00:11:03] So consumer staples is not the defensive sector that it once has been and because fundamentals are still in a downtrend, coupled with all of the impetus and the tailwinds for better earnings growth going forward, I think it's going to have a tough time keeping up. On the downside I would say be wary of energy because they're overearning, be wary about utilities because that is usually a classically defensive sector that doesn't do well when the Fed's cutting outside of recession. Consumer staples, oh, by the way, has a whole lot of problems from an operating margin perspective or a pricing power perspective relative to history.

[00:11:38] Jordan Chevalier: That's fascinating. We can't do bottom sectors without the top question. What are the top three sectors right now, Denise? Let's go through those.

[00:11:46] Denise Chisholm: Well, technology would be number one, for sure, and it still looks like the risk-reward is positive there, again, valuation notwithstanding because fundamentals are in such good shape. Number two would have to be consumer discretionary at this point. I'm actually writing a bunch of different notes on homebuilders specifically. Given that the Fed was on pause for about nine months and is now cutting again we are in a situation where we might see a bigger translation to stimulate the housing market than we did nine months ago. What you see is only 70% of the time when the Fed's cutting rates the long end or 10-year yields fall. We didn't see that happen over a year ago. In fact, depending on your timeframe, when the Fed was cutting we actually saw mortgage rates in the U.S. go up. The reason was because inflation at that time was well above average. That is not our setup now despite tariffs. That translation mechanism of the Fed cutting to lower 10-year yields to lower mortgage rates is likely to actually have that transmission mechanism that we usually see in history. If you add that on top of the fact that homebuilders are still in the bottom quartile of their valuation, meaning the stocks are cheap, that has been a really good setup historically. Homebuilders, consumer discretionary is number two in terms of sectors.

[00:13:10] Number three is financials. Again, the starting point on valuation is a real advantage. Usually you don't have to wait for fundamentals to actually be better. I think that that's still true in financials and as much as people focus on banks I actually think brokers and capital markets are some of the place where fundamentals are best. So technology, number one, consumer discretionary, number two, specifically homebuilders, and then I would say financials, number three, specifically brokers and capital markets.

[00:13:44] Jordan Chevalier: That's great. That's great news. I know everyone's looking again for those top three sectors so thank you for sharing those with us. We've covered tariffs, we've covered the Fed and interest rates, we've covered the sector deep dive, is there something that maybe investors and economists, they should be maybe paying a little bit more attention to, something that isn't making headlines be it a sector or be it something in the markets that might be shifting that people are unaware of or should be paying more attention to, Denise?

[00:14:11] Denise Chisholm: The interesting thing in the market, I think that when investors think that, well, the Fed's cutting and earnings growth is good that means I want to own stocks. I'm saying that that's certainly true this time but I can't prove it to you in the data, meaning that there's not a whole lot of consistent relationship between lower interest rates. Again, that why matters. Even higher earnings growth, the durability of earnings growth matters to stocks. If you're looking for a place that does have a very linear relationship to lower rates and higher earnings growth it is, ironically, Bitcoin. That is ironic because I think a lot of investors think that Bitcoin is a hedge against a secular downturn or negatively correlated. A lot what I see in the data means it's a high beta play on some of the themes that you think equities are exposed to.

[00:15:16] Jordan Chevalier: Okay, Denise, I think that's a great place to leave it. Thank you again for joining us on The Upside and we'll see you again next time.

[00:15:23] Denise Chisholm: Sounds good, always great to be here.

[00:15:25] Jordan Chevalier: Okay, take care. Thank you all for joining and see you next time on The Upside.