Three drivers for a rebound in quality stocks
27 OCT, 2026
Many of the world’s greatest businesses seem out of favour, trading well below their highs. Yet many high-quality businesses haven’t sold off because their competitive positions have weakened. Instead, short-term sentiment has weighed on their valuations, with prices reflecting temporary headwinds rather than a change in their structural earnings power.
For long-term investors, this creates an opportunity.
We see three potential drivers of a rebound in quality stocks: continued earnings growth, scope for valuations to recover and the prospect that easing uncertainty will bring investors back to businesses with enduring competitive advantages.
Earnings growth to boost shareholder value
Our key focus is long-term value creation through cash-flow growth, supported by our own models, which run out for five to ten years. Our portfolio – of around 25–30 businesses across digital transformation, industrials, healthcare and life sciences, and consumer sectors – is forecast to grow earnings by 16% a year in 2027 and 2028, well ahead of the broader market.
We recognise that changes in earnings estimates affect share-price momentum, sentiment and valuations. Repeated upgrades can expand multiples and improve shareholder returns. Our portfolio’s forecast growth underpins its investment case; meeting or exceeding expectations could restore investor confidence. But navigating the changing backdrop requires discerning stock selection.
For example, China’s expanding semiconductor exports illustrate the importance of distinguishing between industries and competitive positions. We believe our holdings, including Nvidia and ASML, are relatively insulated from China’s expansion in mature-node semiconductors because they are positioned in advanced AI computing and leading-edge chipmaking equipment, respectively.
Meanwhile, influencer marketing’s impact is growing rapidly, with global spending in US dollars tripling since 2020. This challenges consumer-facing companies but matters less in many industrial and healthcare sectors. It significantly benefits digital platforms such as our holdings Meta, Alphabet and Amazon, which earn substantial, high-margin advertising revenue from digital marketing.
These trends do not benefit every company equally. Our focus is on businesses whose competitive positions enable them to withstand disruption or capture the opportunities it creates.
Compelling valuations not seen for decades
Quality companies generate high, stable returns on capital and compound them over time. They possess genuine competitive moats, strong balance sheets and experienced management teams that allocate capital effectively, prioritising higher-return opportunities over empire-building. Many high-quality businesses now trade at levels we believe reflect temporary headwinds rather than a fundamental deterioration in their prospects. This has widened the gap between price and intrinsic value.
The valuation premium we pay for these characteristics is at a ten-year low. Investors are often paying a smaller premium than historically for the combination of financial resilience and growth. Periods when quality has underperformed have historically created opportunities for future outperformance. We believe today’s earnings growth and attractive valuations offer a compelling long-term entry point, even though the timing of a recovery remains uncertain.
Easing uncertainty to restore investor confidence
Considerable uncertainty remains over global conflicts, the pace of the AI build-out, and the trajectory of inflation and interest rates. If conditions deteriorate, we believe quality companies will prove resilient thanks to their financial strength.
Strong balance sheets help businesses weather adversity and provide the flexibility to finance opportunistic or strategic acquisitions. As these uncertainties ease, greater confidence in those earnings could support a valuation recovery, allowing shareholders to benefit from both underlying business growth and higher valuations.
For us, quality is not a marketing label. It is a non-negotiable filter at the heart of our investment process. Every company must satisfy our quality criteria before we invest a single pound or dollar. With strong forecast earnings growth, a valuation premium at a ten-year low, and improving sentiment, we believe quality is on sale. When the rotation comes, it will be fast and significant. We believe that moment is now.
