Quality stocks for uncertain times

Uncertainty is a perennial challenge in investing. In any market environment, investors may face a host of known unknowns, plus the unseen risks of unknown unknowns.

2026 is no different. While in many ways the outlook appears strong, there are also profound forces of change and risk at work—from a frayed web of global trade, to the tense state of domestic and international affairs, to the long-term challenges posed by high global indebtedness.

Amid heightened uncertainty, one way to manage risk is by leaning into high-quality companies—businesses with the strength to adapt and thrive as conditions change. Says Sonu Kalra, manager of Fidelity^® Blue Chip Growth Fund (), “In the midst of extreme policy uncertainty, high-quality companies with deep competitive moats, pricing power, and strong brands may be best positioned to navigate the unknown.”

No one knows exactly which stocks will lead in the year ahead. But Fidelity portfolio managers have identified a number of companies that could thrive through a variety of environments—blue-chip stocks in a range of industries, with the resilience to potentially prosper through volatility and to compound earnings over time.

“Uncertainty is the new certainty,” says Sammy Simnegar, manager of Fidelity^® Magellan Fund (). “Quality tends to work when there’s uncertainty.”

The charm of recurring revenues

There is no standard or single statistical definition of quality in investing, and fund managers tend to accentuate somewhat different characteristics. Simnegar looks for "the 3 Bs—brands, barriers to entry, and a best-in-class management team.” But, to him, the single best indicator of quality is the predictability of earnings.

To measure this, Simnegar uses the volatility of earnings-per-share estimates—i.e., how much analysts’ projections about a given company’s profits tend to agree or diverge. He notes that businesses with robust recurring revenues, such as those with subscription-based business models, often score well. “These companies generally offer a unique combination of predictability, growth, and resilience, making them what I consider to be cornerstones of stable, long-term investing,” he says. “I think about subscription-based business models like a tollbooth, collecting a steady stream of revenue regardless of market conditions.”

Costco Wholesale ()¹ has been a good illustration of these dynamics at work, recently showing very low volatility of estimated future earnings, says Simnegar. This predictability, he says, stems from the fact that Costco makes about two-thirds of its profits from membership fees and operates its core warehouse business on such low margins that it crowds out competitors. “People pay to go to Costco because they count on great prices,” he says.

Verisk Analytics ()² is another “tollbooth” example in a completely different industry. Verisk provides analytics and risk-assessment software to the insurance industry globally. Simnegar says that more than 80% of its revenues in recent quarters have been generated by subscriptions, which provide a very high level of recurring cash flow. Again, a key indicator he has favored is that the volatility of estimated earnings has been very low—potentially implying a high level of predictability.

In a similar vein, Simnegar has been drawn to Amazon (),³ which he says earns “annuity-type” fees each year through its Amazon Prime and Prime Video subscription services, in addition to taking a cut of retail sales on its e-commerce site. Of course, the company has also been benefitting from booming revenues in its Amazon Web Services division. “Amazon’s model is like an online Costco, but also with a cloud business,” he says.

Blue chips, yesterday and today

Often overlooked is the shifting nature of “quality blue chips” versus “growth stocks” in today’s stock market. Before big tech reshaped the market landscape, typical blue chips were consumer staples companies, such as beverage or household-product businesses, that grew consistently but slowly, paid steady dividends, and might grow annual earnings per share by a point or 2 more than the average company. To find companies with high growth potential, investors typically focused on small companies—seeking to identify up-and-comers that might ultimately blossom into mid- and large-cap market darlings.

It’s a different era now. “The fastest growers have been the winners in this market,” says Asher Anolic, co-manager of Fidelity^® Contrafund (). The line between blue chip and high growth has blurred or even disappeared completely. Says Anolic, “Think of companies like NVIDIA ()⁴—big, consistent growers that are incredibly high-quality businesses with incredible margins on cash flow and dominant share positions in their industry.”

Contrafund typically focuses on the number one, best-of-breed companies in each sector. Jason Weiner, another Contrafund co-manager, defines quality as “a company that can control its own destiny, such that if the company’s product or service disappeared tomorrow, customers would be very, very unhappy.” An example of an emerging indispensable business would be Canada’s fast-growing Shopify (),⁵ he says, whose e-commerce platform enables merchants worldwide to process orders and payments and manage inventories.

The flywheel effect

What’s confounded many investors during the past few years—the “Mag 7” age—is that many of the fastest-expanding companies have also been the biggest companies. “It’s counterintuitive, since in economics we learn that at some point it gets harder to grow,” says Anolic.

Alphabet ()⁶ and Meta Platforms ()⁷ have illustrated the different dynamics and economics of successful internet business models. Both operate “self-sustaining, self-reinforcing flywheels,” says Weiner, with powerful network effects and billions of customers logging on daily for activities such as search, social media, advertising, and communication.

“These businesses have gotten better and grown faster as they’ve become bigger,” he says. Anolic observes that businesses such as these have not only outgrown the market for 15 years but also have vastly eclipsed the growth rates for traditional blue-chip compounders—and without significantly more volatility. Web-based services such as Amazon and Google have become as ingrained in daily life as toothpaste or paper towels.

Blue Chip Growth’s Kalra, who was a media analyst prior to becoming a fund manager, describes how advertising has been fundamentally redefined by the arrival of digital advertising. “Ad dollars follow eyeballs, and as eyeballs shifted from traditional to digital media, so did ad dollars,” he says. Alphabet and Meta have been 2 of the biggest beneficiaries of that migration and together have been generating close to $500 billion annually in digital ad revenue. “When you’re a market leader, you enjoy economies of scale,” he says. “Over the last 10–15 years, these have been ‘winner takes most’ markets.”

The same logic attracted Kalra to Netflix (),⁸ the global leader in streaming. He says the economics of Netflix’s huge worldwide viewing base permit it to attract top talent, pay industry-leading compensation, and churn out new TV series and movies. Simnegar, who has also favored the stock, likes its “foundation of recurring revenue, which provides unparalleled visibility into future cash flow.” He notes that even after 2 decades of “cutting-edge innovation,” Netflix was able to add 41 million net new subscribers in 2024.

Kalra thinks that Roblox (),⁹ which operates one of the largest video-gaming platforms, has also started enjoying the flywheel effect. “Video games are a hit-driven business,” he says. In other words, gaming platforms need a regular cadence of hot trending games to keep users coming back, the way streaming services constantly need new hit shows and movies. “More and more studio publishers are developing games on the Roblox platform, which is driving more hits—a virtuous development cycle.”

Strong business models on sale

Naturally, one of the key questions in the hunt for quality stocks is valuation. “The price you pay matters,” says Dan Sherwood, manager of Fidelity^® Mid-Cap Stock Fund () and Fidelity^® New Millennium Fund (). “There’s a difference between quality companies and good stocks.”

Sherwood likes to look for quality on sale in sectors with dislocations that appear to be temporary. Two areas that have recently attracted his interest include health care and applications software. Health care has underperformed the market significantly over the past 3 years due to policy headwinds and uncertainty. Applications software stocks have been hammered by the perception that AI will undermine their business models, by enabling almost anyone to create their own software. But both sectors offer “a lot of high-quality companies with strong business models,” he says.

“The market has had a sell-first-and-ask-questions-later mindset with applications software,” Sherwood says. In his estimation, the fears are overblown, especially for “vertical software” companies that concentrate in market niches and have been deeply embedded into their customers’ businesses for many years, with mission-critical software. Two examples of this theme have been Descartes Systems (),¹⁰ which serves the shipping, logistics, and supply-chain-management industry, and Veeva Systems (),¹¹ which provides cloud-based software for the global pharmaceutical and life-sciences industry.

A high-quality wish list—in case of volatility

Unlike some investors who panic and perhaps sell stocks during the inevitable periods of market volatility, many fund managers look forward to such times as chances to upgrade their portfolios. Market pullbacks can provide windows of opportunity to pick up quality stocks at temporarily marked-down prices or add to existing positions in the portfolio. “One of the big advantages I have is a long-term time horizon, which allows me to take advantage of volatility the market may provide on a short-term basis,” says Kalra, who tends to hold stocks for 3 to 5 years and look for companies that he believes can sustain double-digit earnings growth for at least 3 to 5 years.

No one knows exactly what 2026 will bring. But most years come with at least a few episodes of brief nail-biting volatility. One way investors can think like a fund manager—and find the potential opportunity in the turmoil—may be to keep a list of high-quality stocks they’d like to own (or like to own more of) if the price comes down, and stay ready to act if the right time arises.

After all, with quality stocks, fortune favors those who wait. Says Kalra, “If investors can find long-term growth potential, time and compounding can often do much of the heavy lifting.”

More on the funds mentioned above

Investors can learn more about the mutual funds mentioned in this article, including fund objectives and most recent complete holdings, by visiting the fund summary pages on Fidelity.com:

• Fidelity^® Blue Chip Growth Fund (),
• Fidelity^® Contrafund ()
• Fidelity^® Magellan Fund ()
• Fidelity^® Mid-Cap Stock Fund ()
• Fidelity^® New Millennium Fund ()