Insight & Outlook: Fidelity Market Signals Weekly

The journey back to fundamentals

Amid flaring tensions in Iran, the market may have reset to its original 2026 playbook.

1. What has changed in the market over the past few weeks?

While the situation in the Middle East remains fluid and vulnerable to periodic flare-ups—including the recent re-escalation of tensions between Iran and the U.S.—recent market behavior suggests investors view the risks of a broader regional conflict as more contained, and are hence assigning lower weight to this source of near-term market uncertainty. In recent months, investors were bracing for higher oil prices, renewed inflation pressure, and the possibility that central banks would need to stay restrictive for longer.

Oil prices have retreated from highs that were driven by the initial unfolding of the conflict with Iran – even though they remain susceptible to ups and downs related to sudden outbreaks of hostilities. In addition, inflation expectations have moderated. Investors appear increasingly willing to look beyond geopolitical headlines and refocus on fundamentals.

Exhibit 1 shows that the headline consumer price index (CPI) may have peaked in May, and, absent a significant conflagration in the Middle East, it may begin to moderate. Still, inflation remains above the Federal Reserve’s 2% target due to sticky services prices. In many ways, markets may be finding themselves back where they started the year.

2. What was the original 2026 investment thesis?

Entering 2026, the market outlook was built on a resilient economy, supportive fiscal and monetary conditions, healthy corporate earnings, and the potential for leadership to broaden beyond a narrow group of mega-cap stocks.

That thesis also pointed to opportunities outside the most crowded areas of the market, including international equities, cyclical sectors, and small and mid cap companies. The Middle East conflict temporarily interrupted that narrative by raising the risk of a less favorable backdrop: higher energy costs, renewed inflation pressure, and slower growth.

While risks remain and periodic flare-ups in geopolitical tensions continue to surface, stagflation concerns appear increasingly unlikely to define the economic outlook, in our view. Instead, fundamentals appear to be back in focus—corporate earnings, economic growth, productivity trends, and the evolving path of monetary policy.

3. Why does this matter for market leadership?

The biggest implication may be what this means for market breadth. One of the defining features of recent years has been the dominance of a small number of large cap growth companies. But before the Middle East conflict emerged as a market concern, evidence of broader participation was emerging.

International markets, as measured by the MSCI ACWI (All Country World Index) ex USA Index, were outperforming relative to U.S. markets in the first two months of the year. Cyclical sectors were showing renewed strength. Small and mid cap stocks were starting to benefit from improving earnings expectations and lower valuations. The geopolitical shock temporarily interrupted that rotation, pushing investors back toward perceived safety.

With the economy remaining resilient even as oil prices fluctuate amid renewed U.S.-Iran tensions, conditions may once again favor a wider range of sectors, styles, and regions. Put simply, the broadening equities trade may have been delayed but not derailed. Exhibit 2 below shows that since the major indexes bottomed in March, the broadening trade has regained momentum.

4. What factors will influence whether the broadening trend persists?

We continue to monitor several factors that could determine whether this broadening theme gains momentum.

Energy markets: The durability of lower oil prices will be important. A sustained reduction in energy-related inflation risks could relieve pressure on both consumers and policymakers.

Consumer resilience: While some household pressures remain, consumer spending and labor market conditions continue to support economic growth.

Earnings breadth: Strong profit growth extending beyond mega-cap technology would provide important confirmation that market leadership is expanding.

Global growth: Improving conditions outside the United States could support international equity markets and reinforce the benefits of diversification.

5. Investment implications

The market spent much of the second quarter reacting to what could happen if geopolitical risks escalated. Increasingly, investors are slowly shifting back toward evaluating what is actually happening.

If tensions ease, energy markets stabilize and economic fundamentals remain supportive, the investment backdrop could begin to resemble the one investors envisioned at the beginning of the year. That does not eliminate volatility, but it may support a continuation of one of the most important investment themes of 2026: a market that broadens beyond a handful of winners and creates opportunities across a wider opportunity set.

Leadership transitions often occur gradually, but they can create meaningful opportunities for diversified portfolios. If earnings growth expands beyond mega-cap technology and investors become more comfortable taking risks outside the narrowest parts of the market, returns may be supported by a wider set of companies, sectors, and regions.

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