Core Viewpoint - The rebound of "quality" stocks is limited by high short positions and a moderate macroeconomic outlook, which does not provide enough incentive for investors to shift back to defensive, quality stocks [1][2] Group 1: Market Performance - Quality indicators rose approximately 4% in the past week after a significant decline of 17% since July, marking one of the worst declines in recent years outside of the pandemic [1] - The decline in quality factors has exceeded macroeconomic influences by about 10%, indicating that the drop is not solely determined by fundamentals [2] Group 2: Economic Outlook - Goldman Sachs expects moderate growth in the U.S. economy and anticipates that the Federal Reserve will continue to cut rates until 2026, reducing the relative appeal of defensive, quality stocks [1] - The bank forecasts S&P 500 earnings growth of 7% for 2025 and 2026, with target levels of 6800 points by the end of 2025 and 7200 points in 12 months, suggesting limited upside from current levels [1] Group 3: Valuation Metrics - Despite a recent pullback, the valuation of quality stocks remains high, with a price-to-earnings ratio of 25 times expected earnings, compared to 12 times for low-quality stocks, indicating a significant valuation gap [2] - The average short position in the S&P 500 is at 2.3% of market capitalization, well above historical averages, suggesting that short squeeze conditions may persist [2] Group 4: Investment Opportunities - Some quality companies are currently trading at a discount following recent sell-offs, including Adobe, FIS, PepsiCo, and S&P Global, with their stock prices down at least 10% from 52-week highs and P/E ratios below their five-year median [3] - The median expected earnings growth for these stocks is projected at 11% per share by 2026, indicating potential long-term investment opportunities despite overall adverse conditions [3] Group 5: Earnings Season Insights - As of October 24, 29% of S&P 500 companies reported Q3 earnings, with 69% exceeding analyst expectations, significantly above the long-term average [4] - However, stocks that reported better-than-expected earnings underperformed the index by an average of 33 basis points the following day, suggesting that strong earnings have largely been priced in [4] Group 6: Short-Term Outlook - Given high valuations, strong short positions, and a macro environment favoring cyclical over defensive sectors, the short-term upside for quality stocks appears limited [5] - Nonetheless, recent poor performance may present opportunities for investors to buy selected "quality blend stocks" at more attractive price points [5]

Group 1 - The S&P 500 index has risen 8% year-to-date, but there is significant internal divergence within the U.S. stock market, with the median stock still 12% below its 52-week high [1] - The dispersion of returns among S&P 500 stocks has reached a historical high, with a three-month return dispersion of 36 percentage points, placing it in the 82nd percentile of the past 30 years [1] - Nine out of eleven sectors have shown this return dispersion, with all exhibiting return dispersion above the 70th percentile [1] Group 2 - There is an extreme valuation gap between "quality stocks" and low-quality stocks, with quality stocks trading at a 57% premium in price-to-earnings ratio, the highest since 1995 [2] - Historical data indicates that when the valuation premium for quality factors exceeds 40%, the subsequent 12-month price increase has never exceeded 10% [2] Group 3 - Goldman Sachs economists predict that U.S. economic growth will be below trend in the coming months, while inflation remains above target, which may continue to favor quality stocks [3] - The current asymmetry in valuations suggests that if economic and earnings growth show unexpected resilience, there is a risk of a sharp shift towards low-quality stocks [3] - A list of 25 stocks is recommended for investors uncertain about the short-term macroeconomic outlook, as these stocks are likely to be influenced more by company-specific factors rather than overall economic trends [3]