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.
- Positioning: The strategy has slightly more exposure to value stocks, while exposure to growth is similar to the benchmark.
- Performance: On a pre-tax and after-tax basis (net of fees), the strategy rose and outperformed the S&P 500 Index during the quarter.
- Outlook: Continued growth in the U.S. and international economies allowed for a stronger outlook for corporate profit growth and lower risks of imminent recession.
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 hold off on rate cuts until it sees further declines in inflation.
U.S. stocks benefited from improved consumer confidence. If consumers continue to maintain their confidence in the economy, they’ll likely continue to spend on goods and services. This, coupled with a still-healthy job market, could help drive profit growth for U.S. companies. The Fed kept interest rates unchanged as it continued to battle against inflation, which has come down significantly from its peak of 9% but stayed just above 3% since last fall.1
Positioning
Value stock exposure slightly above long-term objectives.
- At the sector level, the strategy had more exposure to industrial and financial stocks compared to the broader market.
- The strategy had less exposure to technology and real estate stocks compared to the broader market.
We believe value stocks still have very attractive valuations, based on measures like price-to-earnings ratios, compared to growth stocks and the broader market. Meanwhile, valuations on growth stocks have become expensive. We believe this may lead to stronger performance for value stocks. Therefore, we have more exposure to value stocks relative to the growth stocks.
We also generally believe that some small or midsize companies may have greater long-term growth potential than some of the largest companies in the market. Therefore, the strategy typically has a modest exposure to smaller or midsized U.S companies.
At the sector level, the investment team had more exposure to industrial and financial stocks. Industrial stocks may benefit from business and government efforts to develop U.S. manufacturing infrastructure. Financial stocks may see continued earnings growth as the U.S. economy expands.
As for areas with less exposure, the investment team leaned away from technology and real estate stocks. Technology stocks may continue to grow, but we believe their high valuations suggest that they generally may not perform much better than the broader market. Real estate stocks may lag the broader market as high interest rates may make their dividend yields less appealing.
Performance
The strategy rose (pre-tax, net of fees) and outperformed the benchmark during the quarter.
- Strong 4th quarter earnings and improving earnings growth outlooks for 2024 likely supported the rally in stocks.
- The investment team’s positions within technology and consumer discretionary stocks helped performance the most.
- Key detractors included investments within health care and communication services.
After lackluster earnings growth for most of 2023, fourth quarter earnings growth came in strong. In addition, financial analysts raised their expectations for earnings growth in 2024.2 This improvement in the earnings backdrops likely led to a strong quarter for stocks.
At the sector level, the investment team’s positions within technology stocks helped performance. Semiconductor stocks were strong performers, as they likely benefitted from investments in artificial intelligence technologies. Within consumer discretionary, investments in hotels and restaurants added the most value. Strong consumer spending on travel and dining likely helped results.
As for detractors, investments in health care hurt results. Pharmaceutical stocks struggled, perhaps as investors debated their long-term growth outlook. Communication services results also hurt returns. The investment team had exposure to a few media & entertainment stocks that had disappointing earnings.
For clients who hold this strategy in a taxable account, market volatility was muted, which led to limited opportunities for tax-loss harvesting. Tax-loss harvesting may help clients keep more of what they earn after taxes.3
The Fidelity U.S. Large Cap Equity Strategy:
- Seeks capital appreciation and to outperform the S&P 500® Index over a full market cycle
- Seeks to diversify the portfolio across large cap styles (value, core & growth)
- We believe this diversification may help to provide stability and capital appreciation over the long-term
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 Stories4
PG&E Corp (PCG)
PG&E Corp (PCG) is a public utility company that provides electricity and natural gas to customers in northern and central California.
In recent years, the company has been challenged by tragic wildfires in its region, including 2018's Camp Fire which was the deadliest in California's history. PCG filed for strategic bankruptcy as a result of their mounting liabilities. However, their filing was a catalyst for getting new state legislation passed that significantly mitigated downside for California utilities in the event of future wildfires.
The stock has habitually traded at a dramatic discount due to wildfire risk but new regulation aimed at capping liabilities, a new management team in 2021 and a promising growth outlook are reasons for optimism.
H&R Block Inc (HRB)
H&R Block Inc (HRB) is an assisted tax preparation services and do-it-yourself tax software provider. We believe that the HRB management team has done a good job controlling costs and preserving margins for the company. We are optimistic that there is room for meaningful margin expansion if revenue growth accelerates.
HRB has committed to providing shareholder-friendly programs including returning all free-cash-flow through dividends (which currently yields 2.7%) and has returned money to shareholders via share repurchases. Overall, we believe the company’s valuation is compelling relative to its peers.
Crown Castle Inc (CCI)
Crown Castle Inc (CCI) is an infrastructure Real Estate Investment Trust (REIT) that has 40 thousand communications towers and 80 thousand miles of fiber optic cables. These assets are crucial to supporting wireless networks.
There is a long runway for demand, as wireless companies continue to develop next-generation networks such as 5G. CCI is also a leader in small cells which is a growth differentiator against its peers.
Small cells are networks of smaller, lower powered antennas that provide coverage and capacity similar to a cell tower, though usually attached to a piece of public infrastructure like a streetlight. We anticipate CCI's funds from operations (FFO) growth to improve in the future. The company's current discounted valuation relative to peers and its attractive yield (>6%) make it a compelling investment.
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® U.S. Large Cap Equity Strategy accounts, subject to FPWA’s oversight.
Strategic Advisers LLC is a registered investment adviser and a Fidelity Investments company.
