by Denise Chisholm, Director of Quantitative Market Strategy, Fidelity Investments
Last week we made the case that the inflection to watch is growth - not inflation - and that stronger growth raises the probability of a more hawkish Fed. Historically, that hasn’t been a problem for equities. But does it change leadership? A short-term chart making the rounds suggests it might: tech stocks have surged even as rates have moved higher, creating what looks like a widening “gap” versus their normally negative correlation. The instinct is to read that as vulnerability - higher rates should be a headwind for tech. But short-term correlations are notoriously unstable and riddled with confounding effects, and gaps don’t have to close the way we expect. Rather than assume the answer, we can let the data speak.
When we segment the environment by growth (strong vs. weak) and rates (higher vs. lower), the results push against the common narrative. Buckets with higher rates actually show better average alpha than those with lower rates. The best outcome – counterintuitively - is weak growth with higher rates, while strong growth with lower rates is the worst. The message is consistent with what we highlighted last week: rates tend to confirm growth rather than derail it. In today’s backdrop - solid growth alongside rising rates - the setup still points historically to favorable alpha for tech, ranking near the top of the distribution.
And that’s before layering in valuation. Despite the recent rally, tech remains in the lower half of its historical valuation range, a reflection of how strong earnings growth has been. Historically, cheaper starting points have translated into higher odds of outperformance, in part because risks - from capex cycles to AI-driven disruption - are already being discounted.
Add valuation to the growth-and-rates framework and both the historical odds and magnitude of outperformance improve, with probabilities in the mid-80% range. It’s not a guarantee, but the pattern is hard to ignore: when growth is intact and rates are validating that strength - and when valuations aren’t stretched - technology continues to look like leadership.
This information is provided for educational purposes only and is not a recommendation or an offer or solicitation to buy or sell any security or for any investment advisory service. The views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Opinions discussed are those of the individual contributor, are subject to change, and do not necessarily represent the views of Fidelity. Fidelity does not assume any duty to update any of the information.
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