Markets have been adjusting to a new wave of disruption
Overall, large-cap stocks have continued to benefit from a supportive market environment marked by strong corporate earnings, resilient economic growth, and improving investor sentiment. While market volatility has persisted at times, confidence in the earnings outlook and broader economic backdrop has helped support stock returns.
Beneath the surface, however, market leadership has been driven by disruptions over the last year. Advances in AI have prompted investors to rethink which companies are best positioned to benefit from the technology. After significantly outperforming the broader market over the previous three years, the MAG 71 stocks have lagged the rest of the market this year. Within technology, software stocks have been some of the biggest laggards in 2026, as investors weigh the potential for AI to disrupt business models and pressure future earnings.
Beyond technology, geopolitical events have been a different kind of disruptor. Middle East tensions have driven oil prices sharply higher, boosting energy company profits and making energy one of the strongest-performing sectors this year. On other hand, consumer-related stocks have struggled despite continued growth in the U.S. economy. Rising energy costs and persistent inflation have raised concerns about household spending power and future earnings growth, leaving consumer stocks among the market's weakest performers.
Taken together, these shifts highlight an important theme for investors: while the broader market has remained resilient, leadership appears to be changing. Opportunities are increasingly emerging in areas that were overlooked just a year ago, while some of the market's previous winners have faced higher expectations and growing scrutiny.
Near-term events have likely shaped market outcomes
Over the past year, these rapidly changing market leadership dynamics have created a challenging backdrop for many active fund managers. While the Fidelity® U.S. Large Cap Strategy has outperformed its benchmark2 (pre-tax net of fees) year-to-date, it has trailed the benchmark over the last 12 months, ending June 30, 2026.
The strategy’s relative performance was influenced by a combination of stock selection and sector positioning. In particular, our positions in communication services and financials weighed on results. Within communication services, portfolio holdings underperformed the broader sector, which itself delivered relatively weak results over the past 12 months. Financials also detracted from performance, as the sector generated only modest returns over the last year.
On the other hand, the portfolio's selective approach within information technology contributed positively, as holdings favored by the investment team outperformed the broader technology sector. These stocks were additive even though the strategy had less overall exposure to the technology sector than the broader market, as some technology stocks have very high valuations or a murky earnings outlook. Our allocation to energy stocks was also additive, with their performance driven by higher oil prices.
Another potential encouraging sign is the strategy’s stronger relative performance trend during the first half of 2026, through June 30, 2026. In other words, the performance challenges over the last year mostly took place in the back half of 2025. Periods of rapidly changing market leadership can sometimes lead to performance challenges in the near-term. But we believe a disciplined investment process focused on company fundamentals, long-term earnings potential, and valuations is more likely to lead to stronger results in the long-term.
Strengthening our multi-model approach
To broaden the opportunity set and enhance diversification, the team recently added exposure to two additional Fidelity investment models* to the strategy: a quantitative large-cap value strategy that employs a multi-factor stock selection process, and a large-cap core strategy that combines Fidelity's fundamental research with quantitative risk management.
The addition of two models enhances the strategy, bringing us to six total, which is designed to capture a wider range of investment opportunities across different market environments within a single portfolio. By bringing together complementary investment approaches, the team seeks to reduce reliance on any one market style, broaden diversification, and position the portfolio to perform more consistently across a variety of market environments. The result is a more balanced and diversified portfolio that can benefit from multiple sources of return while helping to limit the impact of any single approach falling out of favor.
Ultimately, we believe this structure allows us to benefit from a wide range of investment insights while remaining focused on our long-term objective of delivering attractive risk-adjusted returns for clients.
What portfolio managers are focusing on and what they’re avoiding
Looking ahead to opportunities, the strategy currently has more exposure to industrials stocks than the broader market. These stocks have had strong performance over the last 12 months, likely benefiting from the buildout of data centers, manufacturing facilities and other infrastructure spending across the US and the world. As businesses and governments continue to invest in expanding capacity and modernizing infrastructure, many industrial companies may be well positioned to participate in that long-term growth.
The Strategy also has greater exposure to financial companies. While their performance has been modestly positive over the last 12 months, they may benefit from ongoing economic expansion and a higher interest-rate environment, which can support lending activity and profitability.
As for risks, the strategy continues to have less exposure to technology stocks than the broader market. While there are some strong growth opportunities available, tied largely to AI innovation, some technology stocks have extremely high valuations, leaving them potentially vulnerable to bouts of volatility.
Health care stocks are another area where the investment team has less exposure. These stocks have lagged the broader market over the last 12 months and continue to face an uncertain regulatory backdrop.
Staying focused on what matters most
While stocks have provided tremendous growth opportunities over the years, they have also endured numerous challenges over time. From technological innovation to economic challenges to geopolitical events, these have all at one time or another impacted near-term performance for stocks.
Yet over the decades, the US stock market has generally risen with positive corporate profit growth. This is why the investment team remains focused on identifying companies with strong long-term earnings growth potential, durable competitive advantages, and attractive valuations. While market leadership and investor sentiment can shift over shorter periods, the portfolio managers believe that a disciplined focus on fundamentals is the most effective way to create value over a full market cycle. This balanced approach, combining broader diversification with Fidelity's fundamental research capabilities, is intended to position the strategy to capitalize on opportunities as market leadership evolves over the years to come.