HOLT: Year of the contrarian – Positioning after a pause in Quality Growth leadership

The US significantly has outperformed international markets over the past 15 years, but remains expensive. The US market trades at a 50% premium to long-term averages on HOLT’s market implied yield.

Investors have favoured high quality stocks across most regions for the past decade, which helped drive US outperformance. The US has expanded its profitability advantage, driven by the highest quality companies within the US market achieving record levels of profitability. Although concentration levels are very high, the size of the largest US firms appears justified relative to their Economic Profits.

A higher than usual proportion of US stocks trade at 50x multiples, including many of the highest quality companies. Although valuation discipline has not improved returns for Quality investors in recent periods, we demonstrate that over the long term, price paid matters even when buying good companies, as extreme multiples rarely persist.

2024 was a momentum driven market, but leadership has started to rotate and the AI driven rally shows signs of fatigue.

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