Macro Uncertainty Favors High Quality Stocks

You might think defensive, counter-cyclical sectors like health care, staples and utilities would be outperforming amid the murky macro. But after crushing it in 2022, this well-worn strategy is lagging badly YTD (chart).
Instead, focus on high quality stocks. Quants define high quality stocks as those with the following fundamental attributes:
- High returns on equity
- Stable year-over-year earnings growth
- Low financial leverage (debt)

When you think about it, it’s no surprise that quality stocks are steadily outperforming the S&P 500 YTD (chart).
After all, low debt, stable earnings growth, and high returns on equity make these stocks much less vulnerable to the very macro worries that have investors so worked up right now (higher interest rates, shrinking margins, weakening profit growth etc…).
Notice how discretionary and technology are in the driver’s seat YTD, vs prior value-heavy groups like utilities, health care, and staples: