We’ve been in a low-quality rally for more than five years. What happens when the rally breaks?
The stock market has been in a “risk-on” posture for more than six years, since the COVID-19 pandemic market bottom in March 2020. Fueled by aggressive monetary policy and unprecedented fiscal stimulus, the S&P 500 gained 20.8% annually from April 2020 to May 2026 — more than double its historical average — while the Information Technology sector returned 30.8% annually and the Russell 1000 Growth Index added 22.9% per year.
The rally has been driven by low-quality stocks, never more so than since April 2025. The most speculative stocks have rallied since that market low, including stocks related to artificial intelligence, cryptocurrency, mining and metals, and biotechnology.
What happens when the low-quality rally stalls?
If you judge by history, quality stocks stage a comeback after these low-quality rallies. Over the past 25 years, periods of extreme low-quality outperformance have been followed by a quality rally — on average, nearly
3,000 bps of outperformance by quality over the ensuing 24 months.
If markets start to waver, quality factors could be staged for a comeback. As financial conditions tighten, credit spreads widen and valuations for speculative stocks increase, companies with stable profits, low leverage and attractive valuations may be in favor.
