Insight & Outlook: Fidelity Market Signals Weekly

Earnings momentum continues to improve, the economy remains resilient, and equity markets are hitting new highs. Corporate America is delivering—profit growth is accelerating, margins are holding better than feared, and forward earnings guidance has steadily improved.

Beneath the surface, secular investment themes remain intact and, in some cases, are strengthening. Artificial intelligence (AI) related capital spending is elevated and still growing, reinforcing confidence that productivity gains and longer cycle growth opportunities are real rather than speculative. At the macro level, headline labor data remains robust, with job creation and participation signaling ongoing economic strength.

Solid foundation, subtle signals to watch

That said, part of our role in these “weekly signals” is to remain evenly weighted—acknowledging strength while staying alert to emerging risks. While the top line data continues to look healthy, we are beginning to see marginal cracks forming beneath the surface of the labor market, real wage growth, and potentially consumer behavior. These are not red flags today, but they are yellow signals worth monitoring closely.

The U.S. economy has remained resilient, especially given the ongoing geopolitical stress. One development that deserves attention is the ongoing disruptions tied to the Strait of Hormuz. We previously emphasized that the magnitude and duration of any commodity price shock would matter more than the initial move itself. So far, higher energy and shipping costs have not been significant or sustained enough to materially alter the growth or inflation trajectory. Importantly, they have not derailed earnings momentum nor meaningfully dampened risk appetite.

However, has not yet does not mean will not. If commodity pressures persist, the transmission mechanism becomes clearer: higher input costs can erode real wage gains, discretionary spending softens at the margin, and corporate sentiment may turn more cautious. These dynamics tend to emerge slowly and unevenly, which is exactly why it is important not to dismiss them simply because headline indicators remain strong.

What is underemployment telling us right now?

The April labor market tells a useful story. Job growth remains positive, but recent gains are increasingly concentrated, while measures of hiring velocity and job switching have moderated. The unemployment rate held steady at 4.3%,¹  while the so-called underemployment rate ticked higher to 8.2% in April from 8.0% the previous month (Exhibit 1).

Wage growth, while still healthy in nominal terms, appears less compelling once adjusted for elevated living costs. None of this suggests an imminent slowdown; rather, it highlights the possibility that the labor market is transitioning from exceptional to merely good. Historically, that shift matters for consumption trends with a lag.

Consumption, in turn, is where resilience could eventually be tested. Households remain supported by employment and asset prices, but spending growth has become more selective. This is consistent with a maturing cycle, not a recessionary one—but it does argue for prudence in forecasts and discipline in portfolio construction.

Our aim is not to turn cautious too soon or overlook upside, but to frame the backdrop clearly—we still see the good outweighing the bad.

Inflation hedges and diversification

Growth fundamentals in the U.S. have been strong, earnings are broadening beyond certain sectors, and markets are moving beyond narrow leadership. We see compelling opportunities in a broadening equity market, particularly within small caps and international equities, where valuations are more reasonable and growth can have a bigger impact.

At the same time, managing volatility matters. Periods of strong returns can coexist with sharper drawdowns, especially when markets are pricing near perfect outcomes. In that context, incorporating potential inflation hedges and diversifiers can complement growth exposure. This is less about calling for an inflation resurgence and more about acknowledging asymmetric risks tied to energy, geopolitics, and supply chains.

A balanced take on where we are

The economy has proven more resilient than expected, corporate investment—especially around AI—is providing a powerful tailwind, and equities are reflecting that strength. But cycles rarely move in straight lines. Crack formation does not guarantee a downturn; it simply narrows the margin for error.

The key is balance. In our view, it is important for investors to focus on growth where it is supported and look beyond domestic markets and the largest U.S. companies for opportunities. At the same time, stay mindful of risk, keep portfolios diversified, and be prepared for periods of higher inflation or market swings. Staying on track will still require attention since the path forward may be less linear than recent performance suggests.
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