How we prepare for when volatility hits
We have a mantra on the investment teams I work on which is “preparation and patience.” First, you prepare and do the work of analyzing a company—estimate its earnings potential and cash flow under a range of scenarios—to develop a good idea of what the business is worth. After this, you wait for an opportunity to strike.
The advantage of doing that work in advance is that when volatility does hit the market (like it did with Liberation Day Tariff announcements in April) we have already done the work on scores of potential investments and can quickly adjust assumptions and react.
In April, and the second quarter broadly, the health care and consumer discretionary sectors were especially under pressure. Investors perceived that companies in those sectors would fare among the worst in a higher tariff environment. Our research helped uncover a number of what we believe were mispriced opportunities in those sectors. For example, some consumer durables companies with predominantly US manufacturing bases (think appliances, mattresses, and vehicles) were hurt just as much as those that largely imported from overseas. We added exposure to both sectors during the second quarter.
In contrast, the market decided that US tech companies were among the winners of this tariff-related volatility. The technology sector returned more than twice the 10% return of the broader market in the second quarter. We took advantage of that opportunity to trim outperforming stocks in both the software and semiconductor sub-industries within technology.
Fundamentals first, backed by deep research
While we closely follow macroeconomic trends, our investment process is rooted in bottom-up stock selection. We evaluate companies individually, using macro insights to inform assumptions about the likelihood of different economic outcomes. Those insights feed into the assessment of each stock’s value and inform whether we invest in a company and at what size. Attempting to predict macro variables like interest rates has rarely proven successful, which is why we focus on fundamentals like earnings potential and cash flow.
This disciplined approach is powered by Fidelity’s global research network. In the Equity department, we have input from over 150 analysts all around the world. Whenever an analyst updates a model, changes their view on a company, or engages with a company we are invested in, we are notified through a daily research digest. Advanced technology helps surface the most salient research insights, while regular face-to-face discussions with analysts ensure our decisions are timely and well-informed.
Where we see long-term opportunities
This is certainly an interesting, and in many ways, an unusual time. As shown in the chart below, the US stock market is more concentrated at the top than it has been in almost 40 years. What this means is that the top 5 or so stocks (often referred to as the “Magnificent 7”) make up a larger part of the market than it has in decades. These large companies are also much more expensive than the rest of the market.
To be sure, this does not mean that these large companies are likely to run into trouble. They are well-run businesses with strong earnings trajectories. However, history shows that even a moderation in their rate of earnings growth could be enough to cause their prices to fall. Very expensive stocks don't have to become unprofitable or blow up to underperform; they can simply fall short by delivering decelerating earnings growth that fails to meet elevated expectations.
Given this context, we are finding more attractive opportunities among other parts of the market outside large technology companies, including within the industrials and financials sectors domestically, for example. Additionally, non-US stocks are benefiting from a combination of much more attractive valuations as well as an improved fiscal backdrop. The recently announced fiscal stimulus plans in the defense and infrastructure areas in Europe is an example of this. European industrial, health care and energy companies have all become sizable investments across several of our equity strategies. The market is starting to recognize this, with European stocks handily outpacing US stocks in 2025 after a decade-long stretch of US stock outperformance.
Markets are often faster at digesting events than the news cycle. That’s why we focus less on whether headlines are getting better or worse, and more on identifying mispriced opportunities compared to investor expectations.
What’s next for stocks
It’s easy to forget in the “always-on,” instantaneous world we live in, that stocks are actually a long duration asset. By holding stocks, investors have a stake in the growth and innovation driven by American and global entrepreneurialism. It’s easy to be tempted to try to time the market with the torrent of news coming our way and lose sight of that bigger picture.
More specifically for the back half of 2025, we will be paying close attention to metrics such as interest rates and inflation measures, as well as the impact of tariffs on company profit margins and the broader economy. We want to be invested in reasonably priced companies where we believe the upside to earnings-per-share and free cash flow is underappreciated by the market. Our preference is for companies with strategic flexibility, because if anything is certain, it is that unexpected things will come our way.