Insight & Outlook: Fidelity Market Signals Weekly

What we’re watching

Geopolitical risk has returned to the market narrative. The Iran conflict has pushed up oil and commodity prices, and reignited concerns about inflation, monetary policy, and growth risks. U.S. equities declined in March, with both the Nasdaq Composite and the Dow Jones Industrial Average briefly entering correction territory before rebounding. These swings reflect a repricing of risk, not a breakdown in fundamentals. For more, see “A game plan for market corrections.”

Markets are now less focused on supply disruptions and more on the duration of high energy prices and their impact on inflation and the Federal Reserve’s policy. With inflation already persistent, higher energy costs increase the Fed’s policy challenges. The concern is not a near-term recession, but rather the likelihood that monetary policy is perceived as restrictive while the Fed waits for clear signs that inflation is easing.

What investors are pricing in and the disconnect

Investors have turned more defensive, treating elevated oil prices as macroeconomic shock. Inflation break-even rates¹ and rate volatility have risen on expectations that energy-driven inflation will delay policy easing.

Equity market leadership has narrowed, with defensive sectors, energy, and agriculture outperforming the broader market. Markets have repriced the Fed rate outlook sharply: Expectations for multiple rate cuts have vanished, with futures now implying essentially zero cuts in 2026². While inflation risks have delayed monetary easing, another rate hike appears unlikely. As Fed Chair Jerome Powell noted in late March³   the Fed intends to wait for clearer evidence before acting on interest rates.

There is a clear disconnect: Markets are demanding higher risk premiums due to geopolitical and inflation risks, but the data still shows slowing yet resilient growth⁴ . The main concern is how long these risks persist, rather than a sudden drop in demand or earnings.

A strong reality beneath the noise

The fundamental backdrop for the U.S. remains more resilient than sentiment implies.

• Inflation: While headline inflation is vulnerable to higher energy prices, core and services inflation were already sticky, suggesting the oil shock complicates—but does not redefine—the inflation regime.
• Labor markets: Job growth remains above the break-even⁵  level, unemployment is low by historical standards, and wage growth is still positive in real terms.
• Consumer: Household balance sheets remain strong, supported by income growth, excess savings concentrated among higher‑income earners, and a boost to cash flows from larger federal tax refunds tied to the One Big Beautiful Bill Act.
• Earnings: Corporate earnings have not only improved on a year‑over‑year basis but have also been revised higher despite the geopolitical conflict, pointing to underlying fundamental strength. S&P 500 companies’ earnings are projected to grow by 17.1% in 2026.⁶
• Commodities: Higher oil prices act as a tax on margins and real incomes, though they have not yet become a binding constraint on economic activity.

Chart spotlight: Oil would need to hit $700–$1,000 to match past-era strain

Oil shocks today appear far less disruptive than those of the 1970s and early 1980s when measured against household net worth and corporate profits. Relative to current balance sheets, oil would need to trade north of $700 a barrel to recreate the strain seen in past cycles, according to recent analysis by Denise Chisholm, Fidelity’s Director of Qualitative Market Strategy. When oil prices are scaled by corporate profits, the early‑80s shock stands in a league of its own: Oil would need to edge higher to around $1,000 a barrel to generate comparable pressure.

The charts below (Exhibit 1 and Exhibit 2) point to the same conclusion: Recent oil shocks hit a far more efficient economy with far deeper balance sheets, making them much easier to absorb than the analogies suggest.

Top of mind for investors: Implications for portfolios

The current environment favors balance and selectivity over binary positioning.

• U.S. equities: Local equities offer broad exposure, especially companies with pricing power, steady cash flows, and less sensitivity to interest rates or shifts in consumer demand. Those with innovative AI‑enabled business models can also play a key role, helping them capture new opportunities and adapt to changing market conditions.
• International equities: Continue to offer positive opportunities, especially in regions where valuations are reasonable, earnings are inflecting higher, and firms are adopting more shareholder-friendly policies. However, selectivity is key amid ongoing geopolitical risks.
• Fixed income: Policy delays keep rates on the front end of the yield curve sticky. Inflation‑aware strategies—such as Treasury Inflation‑Protected Securities (TIPS) and shorter‑duration bonds—could play a larger role than traditional duration alone.
• Credit: Carry⁷ remains attractive, but dispersion matters. Energy‑exposed credit is more resilient than consumer‑exposed sectors, while lower‑quality credit is vulnerable if higher oil prices persist.
• Commodities: Commodities and gold may provide hedges against geopolitical risk and inflation.
• Currencies: The U.S. dollar tends to hold firm in geopolitically driven risk‑off episodes. Oil exporters benefit from terms‑of‑trade support while importers face renewed pressure.
• Liquid alternatives: Hedged equity, buffered strategies, and yield‑enhanced solutions may offer diversification and help with risk management in volatile market conditions.

Looking ahead: What might change our view?

• Sustained easing in core and services inflation, even with higher energy prices, would reassure markets that inflation expectations remain anchored.
• Clear evidence of labor market weakening, rather than gradual cooling, could give the Fed more room to adjust policy and influence its next rate decision.
• Conversely, a prolonged period of elevated oil prices could increase the risk that restrictive interest rate policies persist longer than currently anticipated by the markets.