Market Minute

From Our Investment Teams

Macro & Market | April 2022

Why Quality Stocks Now?

We think holding quality equities is always in style, but current conditions appear particularly favorable. 

Key Takeaways

We believe high-quality companies are particularly attractive now.

High-quality stocks have historically outperformed the broad market over the long term.

High-quality companies are trading at a discount to the broad market.

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Why Quality Stocks Now?
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What is the Definition of Quality?

In our view, quality companies have the following characteristics. 

Productive Assets

✓ Low Financial Leverage

  • Low balance sheet risk.
  • Low levels of debt. 

Franchise Sustainability

  • Sustainable competitive advantage.
  • High barriers to entry.

Long-Term Performance

We compared the long-term performance of high-quality companies to the broad U.S. stock market from 2002 to 2022.

How did high-quality companies stack up?

A $10,000 investment in the S&P 500® Quality Index would have grown to

The same investment in the S&P 500 Index would have grown to

Growth of $10,000 over the Last 20 Years

Data from 3/31/2002-3/31/2022. Source: Morningstar. Past performance is no guarantee of future results.

Lower Valuations

Price-to-Earnings Ratio (P/E) 

Data from 3/31/2020-2/28/2022. Source: Morningstar. Price-to-earnings ratio (P/E) is the price of a stock divided by its annual earnings per share. A P/E ratio allows analysts to compare stocks based on how much an investor is paying (price) for a dollar of recent or expected earnings. Past performance is no guarantee of future results.


High-quality stocks are cheaper than the broad market.

Quality stocks have underperformed since the COVID-19 vaccine announcements in November 2020, sending their valuations lower.

As a result, the S&P 500 Quality Index is trading at a 22% discount to the broader index.

In the future, we think investors will begin assessing risk more prudently as government stimulus fades, economic growth moderates and interest rates rise. 

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Returns on capital: Net income divided by assets. This measurement shows how well the company uses its assets to generate profits.
Free cash flow: Money remaining after a business pays its operating costs and any capital expenditures.
Accruals ratio: The change in a company’s net operating assets over the last year divided by the company’s average net operating assets over the last two years. Net operating assets are those assets directly related to a company’s operations.
Financial leverage: A company’s latest total debt divided by its book value.

References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

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