24 Mar 2025

  Fidelity | US

Fidelity: US equities sell-off will create opportunities

US equities slide

Since the S&P 500 posted an all-time high on the 19 February, it has declined by over 10 per cent, marking a technical correction. The widely watched 200-day moving average has also been breached. US equities that had climbed strongly following the presidential election of Donald Trump have swiftly reversed course as investors re-evaluate US policy. 

Part of the reversal in US equities seems to be a case of complacency. The market initially focused on the positives of the Trump platform and preferred not to dwell on the potential downsides. Investors hoped that Trump would take a pragmatic approach and use the threat of tariffs as a negotiating tactic without following through. 

By mid-February, it emerged that no immediate agreement with Mexico and Canada was likely, further steel and aluminium tariffs would be implemented, and trade partners India and Europe could be added to the list of tariff counterparties. In March, some of the tariffs on Mexico and Canada came into effect, with the majority postponed until April, while the blanket tariff on China was doubled to 20 per cent. All three countries have promised retaliatory measures. In addition, the Trump administration is considering protectionist policies on copper, lumber, and timber. 

These developments indicate the US is taking a hawkish stance towards its trade deficit with other countries. The implications of these measures are higher input costs and lower margins for US businesses and higher prices for consumers. Trump and Treasury Secretary Bessent have also both indicated they are willing to accept temporary financial market pain to push through their agenda.

Challenges to growth 

The uncertain policy environment has made it more difficult for businesses and consumers to plan investment and spending. While these challenges are not yet showing up clearly in hard economic data - US GDP growth is tracking above 2 per cent and unemployment remains at historically low levels - it is affecting soft data. Recent consumer confidence readings have dipped sharply and even the Republican-leaning NFIB small business survey, which tends to be more optimistic during GOP-led governments, has weakened. 

The market also continues to re-evaluate the potential implications of Trump’s other policies. Immigration controls have been interpreted as likely to lead to a lower influx of cheap labour and consequently higher wages. DOGE-related spending cuts have seen tens of thousands of government employees laid off and that number could ultimately stretch to hundreds of thousands, affecting the spending power of many households, at least in the short term. The combination of tariffs, immigration control, and government job cuts are leading to lower growth forecasts.

Despite that outlook, monetary policy levers may not be able to flex as much as usual. Inflation remains above target, and the US administration’s policies are expected to put upward pressure on prices. If this is the case, it means that despite weaker growth, the Fed may be forced to keep monetary policy more restrictive than they would ordinarily like. Our macro team has placed a 50 per cent probability on a stagflation scenario (higher than target inflation with below trend growth) for the US this year.

Short-term pain, but potential long-term gain

The more pessimistic outlook is feeding through to financial markets. US Treasury yields are falling - not because inflation is coming under control, but because of growth fears. In equities, US stocks have sold off as investors incorporate the revised economic path and the AI theme loses some of its lustre. Previously, AI was powering US equities higher, but this impetus has evaporated in recent weeks as the advent of Chinese rival DeepSeek’s R1 model causes a rethinking of the prospects for the Magnificent Seven stocks.

Although technical signals in US equities suggest stocks are oversold and that we could see some short term rebound given the magnitude and speed of the recent declines, the fundamental outlook is uncertain as the lack of policy clarity will affect the environment for corporate decision making. 

However, we know the Trump administration has an end game - a better  trade balance with its partners and onshoring manufacturing operations. In that light, once the policy backdrop becomes more stable, we could see a continuation or even acceleration of large scale and prolonged capital investment that reorients the economy towards a stronger domestic manufacturing base. As the environment settles, we could also see renewed focus on tax cuts and deregulation.

Outside of the US, we see opportunities in other markets. Europe, which is starting from a point of low expectations, has posted solid corporate results; the region’s earnings revisions have risen quickly, decoupling from the flatter US earnings trajectory. The valuation gap between the US and Europe has reduced as European markets benefit from a re-allocation from the US, although the gap remains wide historically. Europe is the strongest regional performer this year and this may continue. 

Our monthly Analyst Survey of our bottom-up equity analysts around the world shows corporate sentiment improving markedly in Europe while slowing in the US. Ukraine peace talks are already leading to a drop in European gas prices, reducing the price of a key input for businesses. In Germany, the recent election results could signify a watershed moment; a relaxation of the debt brake and potentially hundreds of billions of euros in infrastructure and defence spending over the coming years.

Similarly to Europe, our equity analysts highlight China for improving corporate sentiment. DeepSeek has accelerated the AI race in China and, combined with signs of a more supportive policy environment for technology and potential fiscal stimulus, could sow the seeds of an enduring bull market. 

Investors should bear in mind that the S&P 500 is back to where it was six months ago, and valuations, which were stretched, are moderating. While we expect more volatility ahead, there are opportunities. A US economy transitioning to more domestically driven manufacturing and trading at more reasonable valuations could offer a rich pool of investment ideas for stock pickers. In the meantime, there are opportunities for investors at a global level. Europe and China both have the potential for ongoing market recoveries, while Japan remains an attractive investment destination as it continues to enjoy reflation and structural reform. 


Important Information

This document is for Investment Professionals only and should not be relied on by private investors.

This document is provided for information purposes only and is intended only for the person or entity to which it is sent. It must not be reproduced or circulated to any other party without prior permission of Fidelity.

This document does not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities in any jurisdiction or country where such distribution or offer is not authorised or would be contrary to local laws or regulations. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.

This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. In China, Fidelity China refers to FIL Fund Management (China) Company Limited. Investment involves risks. Business separation mechanism is conducted between Fidelity China and the shareholders. The shareholders do not directly participate in investment and operation of fund property. Past performance is not a reliable indicator of future results, nor the guarantee for the performance of the portfolio managed by Fidelity China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.

Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. This material was created by Fidelity International.

Past performance is not a reliable indicator of future results.

This document may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.

Fidelity International refers to the group of companies which form the global investment management organization that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice based on individual circumstances.

Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German Institutional clients issued by FIL (Luxembourg) S.A., 2a, rue Albert Borschette BP 2174 L-1021 Luxembourg.

Issued in France by FIL Gestion (authorised and supervised by the AMF, Autorité des Marchés Financiers) N°GP03-004, 21 Avenue Kléber, 75016 Paris. 

In Hong Kong, this document is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea. In Taiwan, Independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road., Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C Customer Service Number: 0800-00-9911#2 . FIL Responsible Entity (Australia) Limited ABN 33 148 059 009 AFSL 409340 and FIL Investment Management (Australia) Limited ABN 34 006 773 575 AFSL 237865 hold Australian financial services licenses.

Brunei, Indonesia, Malaysia, Philippines and Thailand: For information purposes only. Neither FIL Limited nor any member within the Fidelity Group is licensed to carry out fund management activities in Brunei, Indonesia, Malaysia, Thailand and Philippines.


Share this article