Key Takeaways
- Market Backdrop: The U.S. economy continued to grow, and the global economy stabilized, supporting positive performance over the quarter in stock markets around the world.1
- Positioning: We increased exposure to consumer discretionary and technology sectors while decreasing exposure to industrials.
- Performance: The strategy outperformed the Lipper® Equity Income Fund Index2 (pre-tax, net of fees) for the quarter and the longer 3-year performance period as of March 31, 2024. The strategy’s dividend yield strongly exceeded that of the S&P 500® Index (pre-tax, net of fees) for the quarter.
- Outlook: Continued growth in the U.S. and international economies allowed for a stronger outlook for corporate profit growth.
Market Backdrop
U.S. and many international economies showed signs of resilience.
- A stronger economic outlook raised earnings expectations, which likely helped contribute to positive stock returns for the quarter.
- The U.S. Federal Reserve (Fed) indicated it will likely hold off on rate cuts until it sees further declines in inflation.
U.S. stocks benefited from improved consumer confidence. This confidence may lead to continued spending on goods and services. This spending could help drive profit growth for U.S. companies. The Fed kept interest rates unchanged as it continued to battle inflation. Inflation has come down significantly from its peak of 9%, hovering just above 3% since last fall.3
Positioning
Overweight in defensive areas and maintaining exposure in other economically sensitive sectors like energy.
- We increased exposure to reasonably priced dividend-paying stocks in the consumer discretionary and technology sectors. We believe these stocks have the potential to sustain and grow dividends.
- We also reduced exposure to industrial stocks during the quarter.
During the quarter, we increased exposure to the consumer discretionary and technology sectors. The consumer discretionary sector underperformed recently in anticipation of a recession and the overall consumer slowdown associated with that. Our research identified a few pockets of opportunity within the sector where we considered the stocks overly discounted, relative to the longer-term earnings and dividend yield potential.
Conversely, we continued to reduce our exposure to industrial stocks, especially among aerospace companies, which are reflecting more of the benefit of recovering domestics and international travel and the associated boost in earnings.
We continue to believe the portfolio is well-diversified across the S&P 500® Index's 11 sectors. We remain overweight in some defensive sectors such as consumer staples and utilities, while maintaining economically sensitive exposure in sectors such as energy.
Performance
The Equity Income Strategy delivered positive returns (pre-tax, net of fees) in Q1 but underperformed the S&P 500® Index.
- The strategy outperformed the Lipper® Equity Income Fund Index4 (pre-tax, net of fees) for both the quarter and the longer 3-year duration period as of March 31, 2024.
- The strategy’s dividend yield strongly exceeded that of the S&P 500® Index (pre-tax, net of fees) for the quarter.
The communication services sector, which is dominated by several non- or very low yielding stocks, led the market in the quarter. More defensive sectors such as REITs and utilities lagged the market in a strong quarter. Our relatively low exposure to communication services and our relatively high exposure to utilities hurt overall performance. Strong portfolio manager stock selection in energy and consumer discretionary stocks helped to offset some of the drag from the low exposure to communication services.
The Fidelity Equity-Income Strategy
- Seeks capital appreciation over a full market cycle.
- Seeks to provide dividend income greater than the S&P 500® Index.
- Seeks to focus the portfolio on more reasonably-valued, dividend-paying stocks. We believe these stocks provide the prospect for sustained and growing dividends.
- Seeks to underweight more expensive dividend-paying stocks.
Outlook
The outlook for corporate profit growth has been strong. We believe the risk of an imminent recession was low as economies across the globe continued to grow.
- The job market continues to show signs of strength, wages have been rising, and consumer spending has remained positive.
- Bouts of volatility may occur as the U.S. remains in late-cycle expansion.
In addition to a strong job market, rising wages, and positive consumer spending, global manufacturing activity has shown improvement. These factors have the potential to support earnings growth and ongoing positive stock returns.
We are closely monitoring a few key risks that could change our outlook. Inflation has been more stubborn than markets had anticipated at the end of last year. This may lead to an extended period of elevated interest rates, resulting in slow economic growth. Political news headlines may also contribute to periods of volatility in the lead up to the election this year. However, stocks have historically experienced healthy gains during election years.
We believe our current positioning will likely benefit our clients if markets continue to rise. Furthermore, we believe our positioning may help provide stability if markets experience turbulence from late-cycle volatility. If the economy shows signs of stalling, we are prepared to proactively manage for further risk.
SPOTLIGHT: Featured Stock Stories5
Southern (SO)
Southern (SO) is a regulated utility company operating in GA, AL and MS. SO has recently completed a decade-long project to bring a large nuclear plant on-line in GA, which is helping the company to deliver on faster earnings and dividend growth. A second nuclear unit is expected to come online later in 2024, further contributing to expected future growth.
SO currently has an above market dividend yield, holds the prospect for attractive earnings growth, and trades at a reasonable valuation.
Lowe’s (LOW)
Lowe’s (LOW) is a home improvement retailer, serving both the consumer and professional market.
LOW’s operations have continued to improve over the last few years and the company has been closing its profitability gap compared to its peers. This has allowed the company to consistently grow dividends per share over the last five years. While the market remains worried about a slowdown in housing, our research suggests LOW should be able to successfully navigate crosscurrents in its markets. We believe the company is positioned to improve margins due to strong operations and a market comprised of an aging and growing housing stock.
American Tower (AMT)
American Tower (AMT) is the world’s largest tower REIT, supporting a wide range of services including wireless communications and broadcasting. AMT is also a large player in the data center business.
AMT’s recent decision to acquire a large data center company and exit its India business should lower the volatility profile of AMT’s earnings growth. We believe AMT is poised to benefit from the global trend of wireless companies investing in infrastructure to make 5G more widely available. AMT currently has an above market dividend yield and trades at an attractive valuation.
The foregoing commentary was prepared by Strategic Advisers LLC and Fidelity Management & Research Company LLC. Fidelity Personal and Workplace Advisers LLC (FPWA) has engaged Strategic Advisers LLC, its affiliate, to provide discretionary portfolio management services for Fidelity® Equity-Income Strategy accounts, subject to FPWA’s oversight. Strategic Advisers implements trades for Fidelity® Equity-Income Strategy accounts based on the model portfolio of investments it receives from its affiliate, Fidelity Management & Research Company LLC, but may select investments for an account that differ from Fidelity Management & Research Company’s model.
Strategic Advisers LLC and Fidelity Management & Research Company LLC are a registered investment advisers and Fidelity Investments companies.
