Understanding the Market | Why is the US Stock Market Pursuing "High-Quality" Stocks?
Why are investors interested in this strategy? Because high-quality companies usually perform well during economic slowdowns, such as NVIDIA and Microsoft with strong revenue growth, or stable profit-making companies like Coca Cola and Johnson & Johnson.
Under the shadow of high interest rates, there is a risk of economic recession in the United States. After the new high in the U.S. stock market, it seems that the market has turned to pursue "high-quality" stocks as a support for defensive allocation demand.
Why are investors interested in this strategy? Because high-quality companies usually perform better in an economic slowdown. They are protected by stable finances, low debt, large cash holdings, or other solid fundamentals, making them more resilient to risks. For example, companies with strong performance growth like NVIDIA and Microsoft, or stable profit earners like Coca Cola and Johnson & Johnson.
For example, investment advisory firm GYL Financial Synergies adjusted its portfolio model in 2022 to increase allocation to high-quality stocks, and achieved considerable returns after one year.
The CEO of the company, Gerald Goldberg, explained:
"Historically, high-quality companies usually have higher credit ratings and more robust financial conditions when the economy slows down or enters a recession. These companies have broader moats and often outperform in relative terms compared to lower-quality companies."
For example, the MSCI ACWI Quality Index is a quality factor index based on the MSCI ACWI Global Index, focusing on high-quality stocks. According to research by UBS analysts, whenever the economic growth rate slows down in the short-term six months, the MSCI ACWI Quality Index usually outperforms the global index by 1% in returns.
Although high-quality stocks perform extremely well in times of economic uncertainty. However, when a bull market arrives, their returns often grow slower and lag behind other stocks. Investors can choose different strategies based on different market conditions.
Moreover, high-quality stocks are often relatively expensive. In a 2013 paper, researchers including Cliff Asness from AQR Capital Management found that despite the higher cost of high-quality stocks, there is a "quality premium". By hedging high-quality stocks against other weaker company stocks based on different market conditions, significant returns can be achieved.
Goldman Sachs, UBS, Wells Fargo, and others have all recommended investors to invest in high-quality stocks in 2024.