En avant : Thèmes influant sur les marchés mondiaux en mai 2025 - 12 juin 2025

[00:00:22] Jordan Chevalier: Hello, everyone. My name is Jordan Chevalier and welcome to The Upside. Today we'll be joined by Denise Chisholm, Fidelity Director of Quantitative Market Strategy. Denise will be unpacking how the markets have shifted over the last month, which sectors are facing potential headwinds, and an update on the ongoing tariff news. Denise, thank you for joining us today. It's great to see you.

[00:00:43] Denise Chisholm: Yeah, it's great to be back. Thanks, Jordan.

[00:00:45] Jordan Chevalier: Absolutely. I know things are changing, I would say rapidly. I think a lot of people would agree. What is the data saying about certain changes that we've seen, or maybe haven't seen, that we were expecting over the last month?

[00:00:59] Denise Chisholm: There was a lot of concern from investors that the so-called hard data like jobs, income growth, consumption growth, looked fine but given the fact that we knew that the tariffs, the reciprocal tariffs, were rolled out a lot of the expectation data or consumer confidence data or even the Federal Reserve surveys of individual businesses, all of that data, some of it fell to recessionary levels. If you back up, many people were concerned that the hard data might be fine but it might converge lower to all of the soft data in the expectations. In fact, what we've seen is somewhat the opposite. Once the reciprocal tariffs were rolled back by, let's call it a magnitude of half, what we have seen is a really strong rebound in all of that soft data. I follow a lot of those statistical indicators and they're really good predictors of future earnings growth.

[00:01:55] To be a little quanty about it, when you see bounceback in terms of the Philadelphia Fed's survey of business expectations, when we see that dip to recessionary territory and then go back up to the top quartile that, from a trend perspective is correlated with better future earnings growth. We have to be open-minded that while we might have once thought during the depths of that almost bear market that we saw that earnings might have declined on a basis of even 15%, which is in line with what 20% bear markets have been, historically speaking. We have to open-minded investors that some of that soft data rebound is now suggesting that earnings growth might be better than we thought.

[00:02:41] Jordan Chevalier: Staying a little bit now here but looking towards interest rates and how might future Fed decisions — we don't have a crystal ball but based on what we know how might those decisions change how that productivity shift is going?

[00:02:57] Denise Chisholm: I think from an investment perspective when people think about interest rates they think of it as a key variable. If you tell me interest rates I'll tell you what the stock market can do over the course of the last year or the next year. That, actually, couldn't be further from the truth. In fact, when you look through all of history and you said since 1950, if I as an equity market investor had to bet on interest rates going up or down to get a return, which one should I bet on? The answer is up. The devil is in sort of the details from that, meaning that the why behind interest rate hikes or cuts matter a whole lot more than the level of interest rates and the direction of interest rates. Meaning that if the Federal Reserve is not cutting interest rates because there is stronger growth than expected, the equity market has historically not had a problem with it at all. As much as investors might be focused on the Fed, from my perspective that's actually playing second fiddle to the more primary driver that we just talked about of earnings growth.

[00:04:03] Jordan Chevalier: That's fascinating. To zoom in a little bit on sectors here, I know you have data for all these sectors, are there sort of three sectors that you're thinking, that you are watching right now to say, okay, these are the things, again, as investors, these are sectors we should be watching?

[00:04:18] Denise Chisholm: I'll say one, two, and three is technology, technology and technology, but I will give it to others. Technology looks really interesting because of the correction that we saw in the stock market. The 18 months preceding that my most interested sector was actually the financial sector. The reason behind that was because at valuation levels, meaning whether or not the stocks in that sector are cheap or expensive relative to the rest of the market, given the valuation levels of bottom quartile, so it's in the lowest quartile of its relative valuation in the data that we have going back to 1962, you have a really optimal risk-reward, meaning that the stocks tend to outperform even if fundamentals like earnings growth or net interest margin expansion don't go as well as you expected they would. That means that valuation has historically acted a little bit like a floor. You don't necessarily get a lot better news but if you get better news you have more upside than you thought going in.

[00:05:20] Technology did not look like this until the most recent correction. At that bear market adjacent low what you saw was a contraction in multiples for technology stocks versus the S&P 500 back down to median levels historically. We have not seen those levels in the better part of four years. That's important because when technology for the last four years was hanging out in those top two quintiles of valuation when you look through history it doesn't mean that the sector doesn't outperform. It can. It just means that you're very dependent on getting the fundamentals right. Now, much like financials were during the prior 18 months, technology at this median level of valuation is neither cheap nor expensive. But from these levels you care a lot less as an investor because you still have strong odds about performance even if earnings numbers have to come down or even if operating margins contract. Think of that as like a mathematical way of thinking through just how much historical precedent there is for tech stocks to discount bad news in advance.

[00:06:33] That's my number one sector but I will say financial still ranks in the top three for all the reasons that we talked about and, specifically, the credit impulse in the United States. Small businesses and small banks were in a credit crunch or a mini recession really since 2022. A lot of the survey data that I look at has actually improved quite a bit. This is happening at the exact same time that earnings growth or that credit growth is inflecting higher. This has been a really strong risk-reward for the sector. The third that I'll tag on to is the consumer discretionary sector. Much like technology stocks I think consumer discretionary stocks got to a valuation point over the last year or so where the risk-reward was negative but because free cash flow grew so strong and because the companies generated so much free cash flow after earnings, after capital expenditures, the stocks are now cheap on it. So I'm looking for this sort of trifecta of signals where the stocks are, in my mind, cheap relative to what we've seen in the historical data and that provides, historically speaking, an optimal risk-reward scenario. Technology would be first ranked, financials second ranked and then consumer discretionary third ranked.

[00:07:53] Jordan Chevalier: Keeping with the theme of ranking with the top three comes the bottom three. What are you seeing in that sort of bottom three bucket? Have things changed there at all?

[00:08:03] Denise Chisholm: The nice part about examining sectors and the historical data is that they're fairly consistent because you can divide them into these offensive sectors and defensive sectors. Defensive sectors are sectors like consumer staples, health care, utilities and the old telecommunication services. The reason why we call them defensive is because they're usually protective if the market goes down or if earnings decline, so much so that if you basketed them together and knew with perfect foresight that stocks were going to decline more than 25% that basket has 100% odds about performing. Of course, the trick is knowing with that perfect foresight. In the bear market that we saw at the low, what you have seen historically was that rotation into those defensive sectors, consumer staples, health care, utilities, and telco, came about 70% of the way to a typical recession. That's back to that first point, is that we came most of the way through to discounting what a typical recession is, and this includes some much stronger and deeper recessions that we've seen historically in terms of the defensive rotation, and it might be the situation where we don't see a recession on the horizon. With that, given that these stocks have rotated so strongly into defensive sectors it is a very negative risk-reward from this perspective, especially if earnings growth stays strong and much stronger than we would expect at that fair market low.

[00:09:34] In terms of the bottom rank sectors number, I would say one and two, are health care and consumer staples for that reason. I think given that the stocks discounted a recession the risk-reward is more negative here. When you look back in history the fact that these sectors are much, much less profitable than they have been in, let's call it, the '60s, '70s, '80s and even in the early '90s creates a potential that even at the valuation levels we're looking at offer a value trap. Consumer staples, health care and then the other sector that I would add is energy. This is a little bit different. What we saw historically in 2022 were some of the best fundamentals, whether it's free cash flow generation, operating margins, any profitability measure, what we saw in 2022 was energy fundamentals were literally off the charts. These companies have never made more money given that they cut capex so much and given that oil prices recovered so steeply.

[00:10:39] Now the problem that these stocks are faced with, let's forget about OPEC supply, let's forget about the U.S. shales, the problem that these stocks are faced with is that earnings need to renormalize. We are not at normalized profitability levels yet which might mean that earnings continue to decline. With earnings continuing to decline the risk-reward for the sector is still negative. If we had to think about the bottom three it would be health care, consumer staples and then energy stocks.

[00:11:10] Jordan Chevalier: That's fascinating. Staying with that a little longer are there any signals, potential signals, that investors can look to those three sectors ... maybe we can pull one or maybe two out ... that maybe signal that those valuations might change? Anything to watch on that front?

[00:11:25] Denise Chisholm: The one thing that I always watch and it does get a little quanty is credit spreads. The credit market, if anybody sort of follows the vernacular, the credit market has historically been the smarter market. When there is fear in the credit market equity investors should listen. By fear I mean what yield are you demanding for junk or high yield bonds versus the risk-free rate? When that's widening, give me more coupon to take on all this risk, that's usually a bad setup for equities, meaning that the credit market usually has a better predictive measure of figuring out if there's going to be more bankruptcies, if there is going to more credit stress. When you see fear in the credit market versus no fear in the equity market that is usually a negative setup for equity.

[00:12:21] Right now over the last year we've actually seen the exact opposite. In fact, credit spreads are tighter than they were in not only 2022, which was the recession that didn't really happen, but also then in 1998 where some ... certainly technicians are using market parallels. The credit market is saying, there's not a whole lot to see here right now. As much as we are worried about things there's a lot of credit stress but equity investors are still very fearful based on my measures. You can measure it with, at the low we saw the VIX above 50 which is certainly a measure of fear. That's historically a really good setup for equities. That's almost the math behind how equities can climb the wall of worry because if the credit market is saying not a whole lot to see here and the equity market is saying I'm very scared that's usually a good setup. That's the indicator that I watch most of all every day which is high yield credit spreads.

[00:13:23] Jordan Chevalier: Denise, thank you very much for that sector overview. Shifting now to tariffs. It's something that I think we have to talk about. Lot of questions all over the place on where are we? My question for you specifically looking at the data is there any sort of data points or things that we've seen in the past that might give investors sort of an indication of where we could potentially be headed with the tariff story?

[00:13:47] Denise Chisholm: That's a big question and a big pushback I usually get in terms of, well, how can you historically analyze tariffs? We haven't had tariffs at this level in, I don't know how many years. I've seen the chart, I can't remember off the top of my head. What you can see is that tariffs are a tax and we have a whole lot of experience with taxes. The problem with tariffs is we don't know exactly where the tax lands. It could be the foreign producer pays some of it. It could some of is absorbed through currency. It could be that it lands on the U.S. consumer but if the U.S. consumer doesn't want to pay higher prices then it lands in corporate profit margins. We don t know how the tax is distributed but we do know it's a tax.

[00:14:28] Given the rollout of reciprocal tariffs were about 30%, that's $3.2 trillion of imports in the U.S., 30% universal tariff or 30% tariffs overall is about a $1 trillion tax. If we say none of it is paid by the foreign producer, none of it is absorbed by currency, half of it lands on the U.S. consumer, where does that leave the U.S. consumer? Well, that would have been about a $500 billion headwind. That's a lot of money. That's a 2% hit to income, $25 trillion a year in income in the U.S. A 2% hit to income, that's a big hit. We historically have not seen this from tariffs. We have seen it historically speaking from oil in the '70s and '80s and interest rates. That is in sort of the sweet spot of a potential tipping point for the U.S. consumer. But given the rollback of tariffs we're only seeing potentially about a 15% tariff level. Again, that's $500 billion, let's say, of tariff income. Half ends up on the U.S. consumer, that's $250 billion. That's a 1% headwind.

[00:15:40] We had experience with 1% tax hikes to the U.S. consumer, 1968, 1993, 1982. None of those were recessionary. Why? Sounds like a big hit, right? Why? Often, there are offsets. Back to the first question you asked me and then I answered in terms of energy prices have been very critical. That peak-to-trough decline that we've seen over the last year is exactly that 1% tailwind to offset the 1% headwind. That's some math behind tariffs where the market might have discounted, appropriately so, a whole lot of recession risk that once tariffs were rolled back now all of a sudden looks to be much, much more balanced given the tailwinds that we're seeing in other areas.

[00:16:27] Jordan Chevalier: So if I understand correctly, even when we think there aren't past data to predict there's something that we can look for as an indicator as investors, even when we're talking about tariffs.

[00:16:38] Denise Chisholm: The patterns repeat. The exact things are not always similar. There's not a perfect analogue but the patterns always repeat.

[00:16:47] Jordan Chevalier: Staying now with top news items, this U.S. tax bill. Another thing, it's all over the news, people are understanding a little bit about it but can you kind of take a step back and unpack exactly what's happening here with this latest tax bill in the U.S.?

[00:17:02] Denise Chisholm: Sure. Well we use the tariff math because I think that that's a little bit of the way we need to think about as investors. Remember, at that low in terms of the market being down 20%, almost 20%, bear market adjacent, what we were discounting was a potential for a $500 billion headwind to the U.S. consumer. Now it's looking a whole lot more like maybe 250 billion, again, sort of my guess is maybe worst case scenario half ending up on the U.S. consumer, that now looks to be more than offset with the decline in oil prices. Now enter the potential for a tax cut. Some of the estimates, and we'll see how it all turns out, the House passed their bill, the Senate needs to pass theirs, they need to reconcile everything in reconciliation, but it's looking like a little bit more of a tax cut. Somewhere between 150 to maybe even $350 billion for the U.S. consumer and almost more importantly, about 300 to 500 billion for corporate America, so a corporate tax cut.

[00:18:07] Again, rewind to what we discounted. We discounted something of a $500 billion hit but it might be a situation where instead of a headwind all of it nets out, tariffs, oil prices, tax cuts to a marginal tailwind. So back to sort of square one that we talked about with, no, don't watch interest rates or the Fed, watch earnings growth. To the extent that earnings aren't nearly as bad as we thought then the market has more upside than investors may expect.

[00:18:41] Jordan Chevalier: We've unpacked a lot today, Denise. Before we go is there one thing, or maybe a couple of things, that you really think that investors should be looking for? Sort of some final thoughts here before we close out the discussion.

[00:18:53] Denise Chisholm: Just always remember that the market's a discounting mechanism. Sometimes even if you know bad news is coming the market can go up anyway. We saw this as recently as 2022 but going back to the '70s and '80s is the best example we have of it. When usually I ask people when the low in the market was between 1976 and 1985 most people pick 1982 because that was the bear market low that investors remember because it was the biggest recession. In fact, the low was in 1978, before either recession in 1980 and 1982. It doesn't mean stocks didn't go down in 1980 and 1982 but the low in 1982 was higher than the low in 1980 which was higher than the low in 1978. You could have closed your eyes, held your nose, bought equities and said, yeah, it doesn't matter that we're going to experience two recessions, two back-to-back recessions, and the second one is going to be the longest and deepest since the Great Depression and I think I want to hold equities through. That's exactly what actually worked.

[00:20:01] Jordan Chevalier: Denise, thanks again for an incredible discussion and would love to have you back so we'll see you next time. Thanks again for everything.

[00:20:10] Denise Chisholm: Always great to be here.

[00:20:12] Jordan Chevalier: For more from Fidelity please head to fidelity.ca's investor education section and visit our Fidelity Canada YouTube channel, Instagram and LinkedIn pages for more investor content. Thanks again for joining and see you next time on The Upside.