Why “quality” investing is under pressure

By James Yardley on 23 April 2026 in Equities

 As global stock markets flip-flop with every new development from the war in Iran, an investor’s usual strategy would be to gravitate to companies with dependable cash flows and dividends. These companies can sit out economic turbulence and deliver predictable returns for investors. That strategy may make particular sense today, given that these ‘quality’ companies have been struggling, but it requires some discernment.

The recent weakness of the ‘quality’ factor was highlighted by research from JPMorgan Asset Management. It said

“2025 was one of the factor’s most challenging years globally as quality underperformed its 30-year average nearly everywhere. This broad-based underperformance echoes prior periods of speculative fervour when investors prioritised growth expectations over profitability and financial risk measures.”

It was the fourth most challenging year globally since JPMorgan’s data’s inception in 1990. Only rebounds from crisis periods — 2003, 2009 and 2020 — were worse*.

There were plenty of reasons for this weakness. Consumer staples and healthcare companies are both well-represented in quality indices. Consumer staples companies have been held back by fears over GLP-1s and their impact on demand. At the same time, these companies have been in the eye of the storm on tariffs, with real uncertainty on the ultimate outcome of US trade policy.

Healthcare has also been hit by an unpredictable US administration. There have been concerns on pharmaceutical tariffs, with companies ultimately forced to do individual deals with the US administration to keep tariffs lower. Robert F Kennedy Jr’s position as US health secretary has also been problematic, with disruption among the major regulators.

However, all these factors are either well-understood, reflected in valuations, or unlikely to be as impactful from here. JPMorgan’s research says:

“One lesson we take from previously challenging times for the quality factor is that historically, the periods when low quality stocks significantly outperform higher quality tend to be short-lived — and are often followed by periods of strong outperformance, as fundamentals reemerge as a key driver within equity markets.”

It adds that high-quality stocks are now priced at a discount, both to the broad market and relative to their long-term history*.

Opportunities in quality companies

This picture is echoed by fund managers. Stuart Rhodes, manager of the M&G Global Dividend fund, spreads his portfolio across quality, asset-rich and high
-growth companies and says that his quality weighting is high relative to history. He says:

He says there has been a “big, big underperformance from quality that we really haven’t seen for a long time,” adding, “the only time I can think of a period that was close to this was just in the recovery from the financial crisis, and that was really only because quality had outperformed by so much going into the crisis. Over the past 12 to 18 months or so, you can start to see quality starting to reassert itself as the largest position within the fund.

However, he says markets are never completely wrong and investors still need to pay attention to the problems that have led some quality companies lower. He makes a distinction between Coca-Cola and Pepsi, for example. Until recently, the fund continued to hold Coca-Cola, which missed some of the ‘bubble’ for quality in 2022 and 2023, but has also shown better discipline on its pricing, keeping costs lower for consumers. Pepsi is more likely to be drunk at home, and has therefore been more vulnerable to cost-cutting by households. Coca-Cola’s share price has held up relatively well.

Another problem is that many of the technology names are still labelled as ‘quality’ companies, with Meta, Apple, Nvidia and Microsoft the highest weightings in the MSCI World Quality index**. The index still has around 30% in the technology sector, more than consumer staples and healthcare combined**. While quality as a whole may be cheaper, there are segments of it that are highly priced.

Valuation discipline

Nick Clay, manager on the TM Redwheel Global Equity Income fund, says that markets are reverting to patterns of normal volatility, after a period when volatility has been unusually low. This return to normality requires a return to some “old-fashioned attributes”, he says:

These are qualities naturally shared by quality companies. However, Nick argues that this needs to be combined with a strong valuation discipline. He says: “There are many ways to reduce downside risk, and within a long-only equity approach, valuation and durability of a company’s cashflows becomes paramount. The durability of the cashflows enables companies to suffer disruption, whether that be macro or micro-driven.”

GQG Partners is a quality-focused manager and it is seeing real opportunities in the defensive sectors. Jonathan Miller, client portfolio manager on the team managing the GQG Partners Global Equity fund, says that healthcare, consumer staples and utilities are at record lows in terms of exposure in the US index.

“On the flip side, the AI-related stocks make up nearly half the market. If we take that further, tech in its own right is at the largest gap ever versus defensives. When we’re looking at earnings visibility, headroom for growth and attractive valuations, we’ve got really high conviction in these so-called defensive areas.”

He says utilities are delivering “faster, more predictable and consistent earnings growth than they have in years.” Clear earnings visibility and attractive multiples. The fund holds TotalEnergies and American Electric Power Company***. Consumer staples, he says, “did very well during Covid as consumer behaviour shifted towards spending on essentials.”

He says their team is focusing on companies that have shifted their product mix, are delivering organic sales growth and being strategic with price increases. On healthcare, they have invested in groups such as Johnson & Johnson***, alongside some European consumer names: “In Europe, healthcare stocks are trading at 20-year lows relative to the wider market.”

Quality companies have a lot to recommend them in this environment, but investors need to be selective. A blanket investment in quality companies could see investors with a fistful of expensive technology names, but also companies that have become cheaper for good reason. Some opportunities are emerging for discerning fund managers.

*Source: JPMorgan, 13 February 2026
**Source: index factsheet, 31 March 2026
***Source: fund factsheet, 31 March 2026