Insight & Outlook: Fidelity Market Signals Weekly

What we're watching

The CMSG team believes the economy will accelerate in 2026, and we’ve advocated for a broadening market with expanded asset allocation. We believe U.S. consumers are a durable pillar of this economy—and with a major tax-refund tailwind now approaching, consumers’ bolstered capacity to spend strengthens our belief for the 2026 economic outlook. In related news, the U.S. economy has continued to shrug off lukewarm jobs reports (most recently, Friday’s release was delayed due to last week’s partial government shutdown). It isn’t simple to reach a binary conclusion on whether the eventual jobs data is "bad" or "good" for consumer spending. Job gains have been sideways since April 2025, and the unemployment rate has remained similarly static—yet the economy has accelerated. While job and income gains are important, the relative wealth of consumers is becoming a more significant factor for their propensity to consume.

Top of mind for investors: Why markets care when PMI breaks 50

The improvement in manufacturing aligns with our ongoing thesis that market breadth is likely to broaden beyond mega-cap stocks. Better PMIs, combined with steady AI-related capital expenditure, are incrementally supportive of cyclical sectors, small caps, and beneficiaries of industrial spending. Although tech earnings have remained resilient, momentum could face headwinds after the rapid run up in key tech sectors. Stronger manufacturing trends provide a counterbalance, in our view. This should support a gradual rotation toward cyclicals as their earnings trajectories align more closely with improving macro conditions.

Chart spotlight: Cyclicals may gain traction relative to defensive sectors

Research by Denise Chisholm, Fidelity’s Director of Quantitative Market Strategy, has posited that one of the most useful ways to analyze PMI is over rolling one-year periods, as opposed to more volatile month-to-month analysis. Framed in this way, PMI tends to fall into four distinct regimes: expansionary and rising, expansionary and falling, contractionary and rising, and contractionary and falling (see Exhibit 1).

A PMI reading of above 50 and rising has historically delivered the strongest industrial production growth and some of the most favorable environments for equity earnings—particularly within industrials and some other cyclicals. Machinery, transportation, and other cyclical industrial subsectors have shown the highest odds of outperformance during this phase.

A new catalyst: The 2026 tax-refund surge (OBB/OB3^*)

The most immediate and powerful near-term boost to consumption is poised to come from significantly larger federal tax refunds, which are expected to reach $517.3 billion, up from $359.3 billion in 2025.² This may result in one of the largest tax-refund seasons in U.S. history, with refund payments projected to rise approximately $1,000 per filer on average.

Refund size will be directly fed by new provisions such as no tax on tips, overtime, or auto loan interest, along with a higher standard deduction and a major expansion of SALT deductibility. As a result, millions of households will likely see meaningful increases in disposable cash early in Q1 and Q2.

The spending implications

Refund season is historically one of the strongest periods for discretionary consumption—including travel, durable goods, entertainment, home improvement, and financial catch-up behavior (debt paydown and savings). Larger-than-usual refunds could amplify this effect.

Top of mind for investors: How does wealth vs. labor income affect consumption?

While labor income is a disproportionate factor for consumption, it continues to decelerate as wealth accelerates. The wealth effect is becoming a bigger factor in determining consumers’ propensity for consumption.