Insight & Outlook: Fidelity Market Signals Weekly

What we're watching

A breakout month for manufacturing

U.S. manufacturing recovery has accelerated meaningfully, with the most notable signal coming from the Institute for Supply Management’s purchasing managers index (PMI), a key economic indicator of the sector’s health. A PMI reading above 50 indicates manufacturing is expanding, while a reading below 50 suggests contraction. Activity jumped to 52.6 in January, the highest in more than three years, compared with 47.9 in December.¹ The decisive move marked the first reading above 50 in nearly a year, ending one of the longest contractionary stretches on record.

Among the key underlying metrics in the PMI, new orders posted their largest one-month increase since 2001; output strengthened, and although employment remained in contraction, the pace of decline eased. A slightly higher prices index reinforces the view that inflation pressures remain sticky but not destabilizing. Broader strength among the sub-indexes suggests a more durable return to expansion.

Manufacturing R&D to get a boost from tax policies

Manufacturing contributes approximately 10% to the value-added output of the U.S. economy while services make up approximately 80%. However, manufacturing companies are responsible for 51.8% of all private‑sector research and development (R&D) spending.² The 100% depreciation provision in the One Big Beautiful Bill Act incentivizes manufacturing companies to invest more in R&D, which could translate into higher corporate profitability.

Manufacturing jobs: A tailwind for consumer spending

The delayed January jobs report from the Bureau of Labor Statistics showed the economy added 130,000 jobs, with the unemployment rate ticking lower to 4.3%.³ These numbers were an “upside surprise,” as economists had projected 65,000 jobs and an unemployment rate of 4.4%. While health care and social assistance drove most of the job gains, manufacturing also added some workers, a modest but encouraging signal for the sector.

Most manufacturing firms in the United States are relatively small. In 2022, only 1.75% of these companies had more than 500 employees.⁴ If the upturn in manufacturing activity holds, we could see the sector’s employment stabilize, further providing another tailwind for consumer spending.

Market concentration on its own has not been a worrisome issue, and there historically have been advantages to investing in a concentrated market (see ”Navigating a concentrated equity market”). That said, international investing adds a different set of equity exposures, less information technology exposure, and access to a different set of AI investments that may be underappreciated.

International stocks offer diversification, possibly at an opportune time. Here's why: We’re seeing a broadening earnings trend, with strong growth in all major global regions. Typically, this has favored non‑U.S. equities, particularly when paired with a softer dollar and easing financial conditions abroad, which is the case in early 2026.

What the market may be missing

While headlines have focused on near-term U.S. equity volatility, international markets are benefiting from less crowded positioning, more balanced leadership, and improving policy backdrops—conditions that may contribute to sustained relative performance.

Why it matters

International equities do not need to dominate portfolios, but we believe they warrant a strategic role within a well-diversified equity framework, especially as U.S. concentration risk has reentered the conversation. International exposure can complement U.S. holdings, helping to mitigate concentration and broaden sources of return.

What we’re watching

U.S. equities have pulled back recently, led by weakness in the Magnificent 7, as investors reassess valuations and competitive dynamics amid rising concerns around AI disruption and returns on capital.

On the other hand, international stocks outperformed U.S. stocks in 2025 and have extended that lead year-to-date in 2026. This has been driven by strength in Japan, Asia ex Japan, and Latin America—where improving earnings momentum, corporate reforms, and more supportive policy backdrops have underpinned broader, less concentrated market leadership.

• Japan: Corporate governance reforms continue to drive higher return on equity, improved capital discipline, and sustained earnings momentum, supporting durable relative outperformance.
• Asia ex Japan (notably Korea): Shareholder-friendly reforms and structural exposure to AI and defense investment have reinforced performance and broadened leadership beyond technology mega-caps.
• Latin America: Earlier easing cycles, commodity leverage, and improving macro stability have supported earnings growth and attracted incremental global capital.

Sources of momentum

• Policy divergence and earlier easing cycles: Many non-U.S. central banks—particularly in emerging markets—are further along in easing cycles, supporting domestic demand and financial conditions relative to the United States.
• Shareholder-friendly behavior outside the United States: International companies are increasingly emphasizing capital discipline through dividends, buybacks, and improved governance, narrowing a long-standing gap versus U.S. peers.
• Broader market leadership: International indices offer greater exposure to cyclicals, financials, and industrials, which tend to benefit as global growth stabilizes and leadership widens beyond technology.
• Valuation dispersion vs. U.S. equities: International equities continue to trade at meaningful discounts, creating upside from both earnings growth and multiple normalization.
• Weaker U.S. dollar: Currency trends have supported USD-based returns and lifted reported revenues and earnings for non-U.S. companies.

Implications for portfolios

Active investing works in international—here’s what we found:

• Fidelity research shows that active managers have outperformed their benchmarks across most major international equity categories over time, reflecting the structural inefficiencies of non U.S. markets.
• Greater dispersion driven by local regulation, governance standards, currency dynamics, and geopolitical risk creates opportunities for skilled active managers to add value through security selection and risk management.
• We outlined additional thoughts in a paper titled “Why active investing works in international equities.”