Key takeaways
- Market Backdrop: The U.S. economy continued to grow over the quarter, and the global economy stabilized, supporting positive performance in stock markets around the world. 1
- Performance: The Strategy’s pre-tax performance (net of fees) was similar to the Fidelity U.S. Large Cap Index℠ which was positive for the quarter.
- Tax Management: Muted market volatility during the quarter led to fewer opportunities for tax-loss harvesting for the Strategy.
- 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.2
Performance
Returns were similar to the Fidelity U.S. Large Cap Index℠ (pre-tax, net of fees).
- U.S. stocks were positive in Q1 on the expectation that the U.S. Federal Reserve may cut interest rates if inflation continues to ease.
- Consumer spending remained strong which helped the resilient U.S. economy and contributed to rising corporate profits.
- On a pre-tax, net-of-fees basis, the strategy reflected the benchmark , which returned 10.5% for the quarter.
Within large company stocks, both growth and value stocks were positive for the quarter. However, growth continues to outpace value because of the strong performance by large information technology companies, which tend to be growth oriented.
At the sector level, energy and communication services were the top performers in the first quarter. Energy benefited from rising oil prices during the quarter, while communication services were helped because of its close ties to technology and strong investor interest in artificial intelligence.
We invest with a long-term view and continue to rebalance portfolios in an effort to keep pace with the index on a pre-tax basis. It is important to note that when including fees, the Strategy will generally lag the index on a pre-tax basis.
Investment Objective
The Fidelity® Tax-Managed U.S. Equity Index Strategy seeks the long-term growth potential of U.S. large-cap stocks and to deliver enhanced after-tax returns through active tax management.*
Active Tax Management*
The strategy delivered enhanced returns on an after-tax basis.
- The strategy provided positive after-tax returns (net of fees) for the quarter.
- Volatility remained low in the first quarter.4
- Our active tax management sought to take advantage of more modest volatility to seek out return opportunities.
Over the quarter, we looked for ways to reduce the impact of taxes on your account. Defensive sectors like health care and utilities provided some of the greatest opportunity to tax loss harvest. These sectors lagged the broader market as investors continued to favor stocks associated with artificial intelligence, particularly those of large technology and communication services companies.
While working to reduce taxes is an important part of what we do for clients, our priority is maintaining the appropriate risk and return characteristics of the Fidelity U.S. Large Cap Index℠.
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.
Risks, like these, may lead to economic uncertainty and bouts of market volatility. These are not unusual during late cycle expansions. We remain ready to take advantage of opportunities to tax-loss harvest when volatility arises. As always, helping our clients reach their financial goals remains our number one priority.
The foregoing commentary was prepared by Strategic Advisers LLC. Fidelity Personal and Workplace Advisers LLC (FPWA) has engaged Strategic Advisers LLC, its affiliate, to provide discretionary portfolio management services for Fidelity Tax-Managed U.S. Equity Index Strategy accounts, subject to FPWA’s oversight.
Strategic Advisers LLC is a registered investment advisor and Fidelity Investments company.
