This year’s rally in global equities has been fuelled by earnings largely unaffected by the US tariff agenda. World equity earnings are forecast to rise by around 13% for the year ahead with dividend growth set to top a robust 10%. US share buy-backs have been running at near record levels too.
The rally’s leaders have been cyclicals, including industrials, banks, and other high-beta retail investor favourites. Quality stocks, with their high return on equity, steady earnings and sturdier balance sheets, have trailed. That has been uncomfortable for our thematic and quality tilt, but we think it remains right for longer-term investors.
Three reasons stand out: a cooling US economy; tariffs starting to have an impact on economic data; and valuations looking frothy, stoked by retail speculation, surging option trading, and record margin debt.
Guy Monson argues that now is the time to insist on quality, even if that means lagging exuberant indices.
Watch the video below.