Are “trash” stocks now the safest bet for investors? | The Economist

TL;DR

During geopolitical uncertainty, low-quality "junk" stocks are outperforming high-quality ones because their near-term earnings feel more certain.

Key Points

• 1.The S&P 500's highest-quality subindex and the MSCI World's quality subindex have both underperformed their broader indexes since the Iran war began.
• 2.Energy stocks dominate low-quality rankings — making up ~9% of the S&P 500's bottom quality quintile vs. only ~1% of top-quality firms — and rising oil prices directly boost their earnings.
• 3.High-quality growth stocks (like major tech firms) are valued on profits expected 20–30 years out, making them far more vulnerable when the world becomes unpredictable and those distant projections lose credibility.
• 4.Low-quality stocks carry lower price-to-earnings multiples, giving them room to appreciate, while expensive high-quality stocks face multiple contraction — meaning great stocks can deliver negative returns and bad stocks positive ones.