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Since April 8th, there’s been a complete unwind of Low Vol’s outperformance. Markets have been quick to shrug off apparent risks to the economy and investors are gravitating back to what worked in 2024. Despite rising uncertainty and the probability of a recession doubling, aggregate valuations have hardly budged.

The US market is forecasted to earn all-time high CFROI (HOLT’s measure of corporate profitability), driven by the secular improvement in profitability achieved by the mega caps and high-quality stocks. There remains a lot to like about Quality – the biggest problem is good companies now trade at a significant premium to the market.

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.

Given the backdrop of rising economic uncertainty, we find interesting that defensive equities screen cheap. High levels of dispersion exist within the relative valuations of the group, as many traditionally defensive areas of the market face potential risk. While headline risk for the Health Care and Staples sectors remains high, the dislocated implied yields suggest a lot of fear is priced in, representing an appealing area of the market for investors to express a contrarian view.

Value spreads remain wide in the US, but economic uncertainty warrants caution in taking on leverage and operational quality risk. International markets like Europe offer more compelling value opportunities for global investors, as a broadening of economic growth prospects in Europe could catalyze the outperformance of value stocks, similar to what happened during the US economic recovery in 2021-2022.