Here’s the surprising reason the tech stock rally may have room to run, says a Fidelity strategist

Alertness and nimble thinking is required. Denise Chisholm (no relation), director of quantitative market strategy at Fidelity, says that investors should be wary of relying too much on their gut instincts, so she analyzes market history to uncover patterns and probabilities that can help inform the current outlook.

And Chisholm has come up with what she says are three surprising investing ideas to consider now.

First, tech stocks and why the current rally could have staying power. The S&P Technology Select Sector index by late this month had gained some 40% for the year to date, yet this surge came as profits for the sector declined in the 12 months through May, she notes.

Chisholm looked at other periods when tech outperformed even as the sector’s profits fell and found the market historically has been good at anticipating earnings rebounds for tech.

“In fact, after 12-month periods when tech profits have fallen but tech stocks have outperformed, the sector’s earnings then went on to more than double over the next 12 months on average, based on data going back to 1962. And the stocks outperformed the broad market by an average of 7 percentage points during those periods,” says Chisholm.

“Past performance is never a guarantee of future results. But if tech stocks have been surging in anticipation of an earnings recovery, then it’s possible this tech rally could have room to run,” she adds.

Next, consumer discretionary stocks. Although purveyors of non-essential goods may be expected to struggle during an economic downturn, Chisholm sees three reasons to be bullish.

The sector is looking cheap, with its price-to-book ratio relative to that of the broader market in the bottom 25% of its historical range, as low as it was during the pandemic in 2020. “After trading at similar levels in the past, the sector has outperformed the market by an average of 4 percentage points over the following 12 months,” says Chisholm.

Falling inflation allows households to spend more on non-essential goods and services. The consumer discretionary sector outperformed the market 70% of the time when considering rolling 12-month periods when inflation was cooling.

Also, the current tightness of bank lending — the sector’s willingness to lend this spring hit the bottom 10% of its range since the mid-1960’s — may seem bad for consumer discretionary, but historically has served as a contrarian indicator.

“When bank willingness to lend hit the bottom 10% of its range in the past, consumer discretionary went on to beat the market more than 75% of the time over the next 12 months—the best odds of any sector,” says Chisholm.

Finally, there’s industrials, where the set up is similar to consumer discretionary. In the second quarter, industrials’ relative price-to-book ratios dropped to the lowest 25% of of its historical range. “After bottom-quartile relative valuations historically, the sector outperformed the market over the next 12 months more than 70% of the time,” says Chisholm.

In addition, the latest Institute for Supply Management manufacturing new orders index dropped to the lowest 5% of its historical range since 1962. That makes it easier to beat expectations, and historically the index’s fall to such levels also left industrials with a more than 70% chance of beating the market over the next 12 months.

“To be sure, there’s no shortage of economic headwinds, and past performance is no guarantee of future results. But my research suggests reasons to remain positive on the stock market—and especially on the technology, consumer discretionary, and industrials sectors,” Chisholm concludes.

Markets

The inflation data came pretty much in line with forecasts and so had little impact initially on markets. U.S. stock-index futures
ES00,
+0.85%

NQ00,
+1.54%
are higher as benchmark Treasury yields
TMUBMUSD10Y,
3.967%
dip. The dollar
DXY,
-0.09%
is little lower, while oil prices
CL.1,
-0.65%
riseand gold
GC00,
+0.53%
goes higher.

Try your hand at the Barron’s crossword puzzle and sudoku games, now running daily along with a weekly digital jigsaw based on the week’s cover story. To see all puzzles, click here.

The buzz

Two data points that are closely watched by the Fed as gauges of underlying inflationary pressures in the economy were released on Friday. The core personal consumption expenditure index for June rose by 0.2% month-on-month, as expected, and the employment cost index, for the second quarter, rose 1% versus expectations of 1.1%.

Other economic data on Friday include the July consumer sentiment survey at 10 a.m.

The earnings season rumbles on. Among those presenting their results on Friday are Exxon Mobil
XOM,
-1.55%,
whose shares are a touch softer after missing profit estimates. Procter & Gamble
PG,
+2.48%
shares are up 2% after price rises helped it beat forecasts, Chevron
CVX,
-0.67%
and Colgate-Palmolive
CL,
-3.68%
shares are little changed.

Intel stock
INTC,
+4.81%
is jumping more than 6% in Friday’s premarket action after the company said PC and data-center sales beat expectations.

Roku shares
ROKU,
+18.95%
are up 10% after the streaming-media company’s earnings and outlook exceeded forecasts.

Enphase Energy’s 
ENPH,
-10.98%
stock is tanking 16% after the company reported revenue that fell short of analysts’ estimates and offered a weak forecast.

The Bank of Japan confirmed that it was tweaking its yield curve control policy, sparking volatility in the yen
USDJPY,
+0.63%
and pushing 10-year government bond yields
TMBMKJP-10Y,
0.550%
at one point to their highest since 2014.

Best of the web

5 ways that buying a car has drastically changed.

Tesla created secret team to suppress thousands of driving range complaints.

Rich white-collar suspects are spending millions to turn their luxury homes into jails with 24/7 guards — and one has already escaped.

The chart

Retail investors have been wary of the latest part of the stock market rally, data from Vanda Research suggests.

“Over the past five trading sessions ending Wednesday, retail traders bought an average of $1.08 billion worth of securities per day, significantly dipping below the post-Covid daily average of $1.2 billion for the first time since early May. This is not all bad news for U.S. equities as retail’s pullback likely implies that stickier institutional capital has supported the more recent leg of the rally…Seasonality and thematic rotations are behind the recent decline in overall net retail purchases,” says Vanda.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

Random reads

With youth unemployment high, meet China’s full-time children.

Here’s what could be the world’s tallest cat

King Charles enjoyed his pie-based doppelganger

Need to Know starts early and is updated until the opening bell, but sign up here to get it delivered once to your email box. The emailed version will be sent out at about 7:30 a.m. Eastern.

Listen to the Best New Ideas in Money podcast with MarketWatch financial columnist James Rogers and economist Stephanie Kelton