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3 investing ideas to consider now

Key takeaways

  • The US economy appears to still have positive momentum, based on forward-looking metrics such as hiring expectations.
  • Stocks in the consumer discretionary sector could be poised to benefit from improving consumer buying power, strong earnings growth, and low valuations.
  • Even after its recent winning streak, the financial sector could still have further room to run.
  • Software companies have been showing market-beating earnings growth and yet have been lagging the market—potentially setting the industry up for a rebound.

Stocks just wrapped up their best 2-year stretch in a quarter century, thanks to back-to-back double-digit gains in 2023 and 2024.

After a bumpy first 2 weeks of the new year, the bull market appears to be back on track as we near the close of the first full month of 2025. Importantly, the economy looks to have positive momentum as well. The Fed’s interest-rate cuts last year appear to have had a positive impact on hiring expectations, which recently bounced to the top 25% of their historical range.

My research focuses on analyzing market history to uncover patterns and probabilities that can help challenge investors' biases and provide a more objective backdrop for understanding the current environment. Recently, my analysis has been suggesting that with this positive economic backdrop, stocks continue to look appealing—with bullish signals looking particularly strong for shares of consumer discretionary, financials, and software companies.

Here's more on these 3 key areas where I’ve been seeing the strongest bullish signals.

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1. Consumer spending could be poised to get a boost

One of my favorite forward-looking indicators on consumer spending comes from the National Federation of Independent Business’s surveys, which asks small businesses about their plans to raise prices and/or wages over the next 12 months. If small businesses are planning to raise prices more than wages, it can be a negative sign for consumer spending, and vice versa.

Recently, small businesses were planning to raise prices and wages about equally over the next 12 months. That represented a big change from most of the last few years, when these businesses were prioritizing raising prices. That shift has positive implications for consumers’ buying power—potentially providing support to stocks in the consumer discretionary sector.

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The sector has been on a bit of an earnings-growth roll, with growth outpacing the broad market since July 2023. Meanwhile, consumer discretionary stocks look inexpensive: Their average valuation recently fell into the cheapest 25% of their historical range, based on free cash flow (which is the amount of cash a company generates after paying for expenses and capital expenditures).

Historically, this has been a decisively bullish signal, with the sector outperforming the market by a wide margin, on average, in the 12 months after similar valuation dynamics.

Chart shows that consumer discretionary stocks have historically outperformed after past periods when relative free cash flow yields fell to their least expensive quartile.
Past performance is no guarantee of future results. Data analyzed monthly from January 1962 to November 2024. Free cash flow yield defined as free cash flow divided by stock price. Analysis based on Fidelity top 3,000 largest US stocks by market capitalization. Sources: Haver Analytics, FactSet, Fidelity Investments.

2. Financials could be poised to extend their winning streak

The financial sector also looks inexpensive relative to its history, even after its recent streak of outperformance.

Forward and trailing price-to-earnings (PE) ratios are 2 of the most important and predictive measures of valuation for the sector. (Forward PE divides current stock price by earnings estimated by analysts for the next 12 months, while trailing PE divides stock price by past-12-month earnings.) Both of these measures were recently in the bottom 15% of their historical ranges. The sector has outperformed from these levels in the past, on average.

Other bullish signals keep piling up for the sector. One of my favorite contrarian indicators is valuation spreads—the difference between the valuations of the sector’s most- and least-expensive stocks—which measures investors’ fear. High spreads imply greater fear and have, counterintuitively, historically preceded outperformance. Valuation spreads among financials recently were historically wide, even approaching recessionary levels. That suggests the market has already priced in a lot of bad news, potentially setting the sector up to surprise to the upside.

Earnings growth has been rising, historically another tailwind for financials, as are recent declines in both interest rates and credit spreads.

3. Software companies showing underappreciated growth

While the market zeitgeist has been focused more on artificial intelligence, I believe software companies have recently looked particularly appealing.

Software companies’ stock prices lagged the broad market over the second half of last year, even as the firms generated strong earnings and free cash flow. The combination of these factors pushed the industry’s average relative valuation into the bottom half of its historical range, based on forward PE ratios. Low relative valuations have been a good sign for software stocks in the past. After periods with similar valuation dynamics historically, the industry outperformed the broad market over the next 12 months some 70% of the time.

Earnings growth may add to the positive outlook. Software companies grew their earnings faster than the S&P 500® over the 12 months through November. In the past, the combination of market-beating earnings and low relative valuations has been a sweet spot for software stocks, which have gone on to outperform the market by an average of 10 percentage points over the next 12 months.

Chart shows that software has historically outperformed after past periods of market-beating earnings growth and low relative valuations.
Past performance is no guarantee of future results. EPS: Earnings per share. Data analyzed monthly from February 1977 to November 2024. Analysis based on Fidelity top US 3,000 stocks by market capitalization. Sources: Haver Analytics, FactSet, Fidelity Investments, as of November 30, 2024.

How to search for investing ideas

Based on this analysis and other research, I believe the current market environment will continue to support stock-market gains. Investors may want to look to consumer discretionary, financials, and software stocks for opportunities.

Investors interested in matching investing ideas to these themes can search for consumer discretionary, financial, and software stocks using the Fidelity Stock ScreenerLog In Required. Or, to search for mutual funds or ETFs that focus on these sectors and industries, investors can use the Fidelity Mutual Fund Research tool or ETF ScreenerLog In Required.

Denise Chisholm, Sector Strategist, Fidelity
Denise Chisholm, Director of Quantitative Market Strategy, Fidelity Viewpoints

Denise Chisholm is director of quantitative market strategy in the Quantitative Research and Investments (QRI) division at Fidelity Investments. Fidelity Investments is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing, and other financial products and services to institutions, financial intermediaries, and individuals.

In this role, Ms. Chisholm is focused on historical analysis, its application in diversified portfolio strategies, and ways to combine investment building blocks, such as factors, sectors, and themes. In addition to her research responsibilities, Ms. Chisholm is a popular contributor at various Fidelity client forums, is a LinkedIn 2020 Top Voice, and frequently appears in the media.

Prior to assuming her current position, Ms. Chisholm was a sector strategist focused on sector strategy research, its application in diversified portfolio strategies, and ways to combine sector-based investment vehicles. Ms. Chisholm also held multiple roles within Fidelity, including research analyst on the mega cap research team, research analyst on the international team, and sector specialist.

Previously, Ms. Chisholm performed dual roles as an equity research analyst and director of Independent Research at Ameriprise Financial. In this capacity, she focused on the integration of differentiated research platforms and methodologies. Before joining Fidelity in 1999, Ms. Chisholm served as a cost-of-living consultant for ARINC and as a Department of Defense statistical consultant at MCR Federal. She has been in the financial industry since 1999.

Ms. Chisholm earned her bachelor of arts degree in economics from Boston University.

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References to specific securities or investment themes are for illustrative purposes only and should not be construed as recommendations or investment advice. This information must not be relied upon in making any investment decision. Fidelity cannot be held responsible for any type of loss incurred by applying any of the information presented. These views must not be relied upon as an indication of trading intent of any Fidelity fund or Fidelity advisor. Investment decisions should be based on an individual's own goals, time horizon, and tolerance for risk. This piece may contain assumptions that are "forward-looking statements," which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

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