U.S. equity strategists at Goldman Sachs, led by David Kostin, commented on the recent rebound in the “quality” factor—a basket of stocks characterized by high returns on equity, low leverage, and stable earnings. Despite this rebound, the improvement remains limited due to still-elevated short interest and a benign macroeconomic outlook that offers little incentive for investors to favor quality stocks.
**Quick Insights**
The recent underperformance of quality stocks stems from a short squeeze that favored low-quality stocks, investor rotation towards riskier names, and a macroeconomic environment that discourages defensive high-quality equity exposure.
Goldman Sachs views high-quality stocks as overvalued relative to their fundamentals. The firm sees limited near-term upside for this group due to stretched valuations, elevated short interest, and a growth and monetary environment that favors cyclical stocks.
Nevertheless, Goldman Sachs highlights several discounted quality stocks—including Adobe, Fiserv, PepsiCo, and S&P Global—that offer attractive valuations and projected growth, despite the broader factor pressure.
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