Insight & Outlook: Fidelity Market Signals Weekly

The latest: The U.S. Supreme Court and tariffs

The Supreme Court’s decision to invalidate the administration’s broad “reciprocal” tariffs removes an important source of immediate trade pressure, but it does not mark an end to tariff risk.

The administration’s swift pivot to a temporary 15% global tariff under Section 122—alongside plans to initiate Section 301 investigations—keeps trade policy uncertainty elevated, even if future measures are likely to be narrower and more procedural than before.

For investors, this suggests continued headline volatility for trade-exposed sectors and multinational margins, modest upside risks to goods inflation at the margin, and a reinforcing case for global diversification as portfolios navigate a more fragmented and less predictable U.S. trade backdrop.

The broadening trade

We remain bullish on U.S. markets, largely based on the earnings trends.

While U.S. earnings growth expectations remain robust, global equity market leadership has broadened, with performance increasingly shared across cyclicals, small/mid-caps, and international markets.

A closer look at international equities

International stocks offer diversification, possibly at an opportune time. The broadening we see is not just performance-based. We’re seeing stronger earnings 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 the case in early 2026.

We believe the combination of policy divergence, improving regional fundamentals, and shifting investor preferences is reinforcing the case for global diversification. This is happening as pockets of U.S. equity leadership tied to artificial intelligence (AI) face near‑term scrutiny.

To be clear, tariffs and potential AI growing pains are not the reasons to consider an allocation to international stocks. It’s this: The benchmark MSCI AC World ex USA offers a different set of quality companies and most of the earnings growth of the S&P 500, but at a 30% valuation discount, and almost two-thirds less concentration risk. (Exhibit 1).

Extreme positioning is a sell-off driver

Heavy derisking, crowded positioning, and forced selling acted as accelerants in the sell-off. Software has experienced one of the largest non-recessionary drawdowns in decades, with investors rotating away from software toward AI-linked infrastructure and semiconductors, and sectors such as energy, materials, and consumer staples.

Recession fears, interest rates, and near-term earnings weakness are NOT drivers of the sell-off

The Atlanta Fed is currently estimating real GDP growth of 3.1% for the first quarter of 2026. Based on our business cycle model, the US economy remains in the expansion phase of the business cycle. The Fed has cut interest rates by 1.75%, and while the yield curve is now upward sloping, rates are not very restrictive by historical measures and financial conditions remain accommodative. The S&P 500 is currently estimated to grow earnings by 14.5% in 2026. Thus, this is a valuation and duration reset, not a sell-off caused by economic or earnings concerns.

The sell-off reflects long-term uncertainty, not collapsing revenues or margins. Technology earnings overall remain strong, but software-specific forward expectations are weakening as investors reassess durability under AI competition.

What we’re seeing beneath the surface

Valuation multiples are turning more cautious

Recent earnings announcements show that current and expected revenue and earnings growth remain strong and management teams are broadly constructive. However, investors have turned cautious and are no longer willing to pay the multiples that software stocks once commanded. The S&P 500 Software & Services Index is currently trading at a multiple of 24 times next 12-month earnings versus its post-COVID peak of 33 times in August 2021. This reflects growing consensus that AI introduces longer-term margin and competitive risks.

Markets are actively sorting winners and losers

Importantly, the current environment reflects differentiation rather than broad risk aversion. Investors are not abandoning AI; they are sorting through which companies can adapt and which may struggle. Software companies with proprietary data, mission-critical workflows, and deep customer relationships are better positioned to evolve and potentially thrive. Meanwhile, as the valuations of longer duration software stocks are repriced for lower terminal values, investors are shifting down the AI stack, favoring infrastructure and semiconductors over application-layer software.

Case for cyclicals remains intact

At the same time, this repricing is occurring against a backdrop of improving cyclical momentum. Manufacturing activity has turned positive, reinforcing the view that the economy remains on stable footing and that parts of the market tied to real activity may benefit. Historically, periods of rising efficiency—driven by general-purpose technologies like AI—have supported both the producers of the technology and the users of it. As AI investment continues to drive demand for chips, data centers, power infrastructure, and industrial capacity, the case for cyclicals and infrastructure remains intact.

Insights

The reset may create opportunity—but selectively

Once positioning stabilizes, valuation dispersion could create attractive entry points in companies with clear data advantages, essential systems, or defensible architectures. The focus remains on selectivity rather than wholesale exits.

What it all means for investors

Fears of structural cracks caused by AI in long-duration business models is leading to a rotation in market leadership, even as economic conditions and corporate earnings remain supportive. Manufacturing momentum turning positive adds a tailwind for select cyclicals, while AI continues to reshape leadership within technology. Ongoing AI innovation means continued reassessment of these long-duration assets. Volatility is likely to persist, but it is also creating opportunity for disciplined, active investors focused on durability, pricing power, and real-economy exposure.