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Diversified, Quality-Focused Portfolios Well-Positioned for 2026
January 2, 2026
Jim Madden, CFA, Tony Tursich, CFA, and Beth Williamson
Summary Points:
We believe:
- Investors with diversified, quality-tilted portfolios will be well-positioned in the new year.
- Not every company will ride the AI wave; there will be winners and losers, and higher quality companies that can justify valuations will be recognized as better investments.
- After languishing in a risk-on environment, quality stocks are trading below historical valuation levels—and are poised for a rebound.
After flirting with bear territory, stocks rose to new highs in 2025, driven by traders’ optimism over artificial intelligence (AI) and hope that Fed cuts will continue to power the economy and corporate profits. Still, the big question on everyone’s minds is whether the trillions of dollars pouring into AI will yield a return on investment. Furthermore, 10-year Treasury-bond yields have risen to highs last seen in 2009, signaling that the rate-cutting cycle may be nearing an end amid sticky inflation and an accelerating budget deficit. This creates challenges for investors in 2026 and likely increases market volatility. Investors with diversified portfolios with a quality tilt will be well-positioned in the new year.
Parts of the economy were strong in 2025, such as semiconductors, data centers, and affluent consumers. But other parts of the economy, such as housing, manufacturing, and lower-income spending, were either flat or in contraction. According to the National Bureau of Economic Research data, it takes roughly 10 months to reset after a downturn. As such, it is likely that economic growth will broaden to some of the struggling pockets of the economy in 2026. Diversified portfolios stand to benefit if consumer staples, real estate, and materials stocks drive market returns.
The AI rally broadened, and bubble fears became more pronounced throughout 2025. Investors debated the disruption the technology represents and whether there is a bubble in AI-related stocks. There is no doubt that AI is having a profound impact on the world, but like the dotcom era, there will be winners and losers. Furthermore, a large concentration of companies that trade above 10x sales is a risky portfolio. Against this backdrop, we believe it’s best to identify high-quality companies that can effectively harness this technology to the benefit of stakeholders and have justified valuation multiples.
Low-quality unprofitable tech stocks surged in 2025, significantly outperforming quality stocks. The chart below illustrates investor enthusiasm for young unprofitable companies (YUCs) relative to companies that make money and generate tangible returns on investments.
Companies with Negative Earnings Outperformed Companies with Positive Earnings
Past performance is no guarantee of future results. Source: Apollo Academy, using Bloomberg, Apollo Chief Economist, “Stock Market Performance Since Liberation Day,” October 20, 2025. Using Russell 2000 companies as of October 2025 with trailing eps, 1,120 companies have positive EPS and 806 companies have negative EPS.
In 2025, quality stocks posted their worst performance since the dotcom era. This is largely because an unusually high number of high-quality stocks lack the strong momentum attributes that are favored in the current risk-on market. Quality stocks—companies with high returns on equity, industry-leading margins, and stable earnings growth—are trading below their historical valuation levels, while the overall market is expensive. Typically, quality stocks deliver strong relative returns after such underperformance. Now is the time to invest in quality!
High-quality Stocks’ Underperformance Is at 1999 Extremes
Past performance is no guarantee of future results. Source: @JeffWeniger on X.
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Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. The views and strategies described may not be appropriate for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations.
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