1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 24
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
Valuations are less predictive of future returns for the equal-weighted S&P 500 index
10-yr annualized fwd returns
15%
10%
5%
0%
-5%
0
5
10
15
20
25
12-mth fwd P/E – equal-weighted S&P 500 index
Source: Bloomberg Finance LP, Scotia Wealth Management
Making the case for quality investing
Market volatility can be mitigated through a high-quality bias. This is especially important in the
current environment of heightened macroeconomic and policy uncertainty, slowing global
growth, and equity markets vulnerable to elevated valuations and concentrated indices.
High quality companies are characterized by sustainable competitive advantages, pricing power,
clean balance sheets, and steady earnings growth. They tend to outperform broader equity
indices over long time frames, and shine during periods of financial market stress.
That said, while quality has historically outpaced global equity benchmarks, it has
underperformed in the recent risk-on environment. Similar instances of quality
underperformance have occurred throughout history, but these periods tend to be brief, with
quality stocks historically regaining leadership in short order. Taking this historical relationship
into consideration, we think long-term investors are best served by continuing to favour highquality companies within diversified portfolios.
Despite periodic setbacks, quality outperforms over generational timeframes.
2.75
2.25
1.75
1.25
0.75
1996
2000
2004
2008
2012
2016
2020
2024
Ratio of MSCI World Quality Index to MSCI World Index
Source: Bloomberg Finance LP, Scotia Wealth Management
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