Time out there is best than timing the market, because the saying goes. Likewise, investors have to be patient for “quality” stocks to outperform over time. Quality stocks are defined as stocks of firms with high returns on equity, stable earnings and low debt. They are known by investors to outperform broader markets over the long run, as shown in Figure 1.
Figure 1: Stock market development (December 31, 1998 – September 30, 2025). In the long run, quality stocks have performed significantly higher than the broader stock market.
Source: CCLA, Bloomberg, MSCI (income net of withholding tax, in local currency). The above data just isn’t annualized. Past performance just isn’t a reliable indicator of future returns. The value of investments can fall in addition to rise.
Clients often ask us, “How did my portfolio perform this quarter?” or “What do you expect from the markets next quarter?” You’re right to ask this query, but individual quarters aren’t at all times essentially the most helpful approach to measure long-term success.
In 2025, for instance, quarterly returns fluctuated, showing how unpredictable short-term results may be. When US President Donald Trump took office in January, he implemented business-friendly tax cuts and deregulated key industries, measures that typically provide market tailwinds.
However, in the primary quarter, the MSCI World Index fell 3.6%. In April, President Trump announced tariffs that many estimates were negative for the U.S. economy. But within the second quarter, the index rose 9.5%. And between July 1 and October 1 this 12 months, the index rose one other 7% despite higher tariffs.
Now some “star” investors claim they will time the stock market. However, most evidence shows that attempting to time the market often ends with poor returns. When we take a look at the info, systematic stock market patterns have mostly played out over time. And over time, quality stocks have historically outperformed other kinds of stocks.
The payout takes time
Sticking to an investment style, including quality, typically signifies that a manager mixes periods of above-average performance with periods of below-average performance.
Figure 2 and Table 3 below show the MSCI World Index (currently 1,320 firms from 23 countries) with its smaller sub-indices, the MSCI World Quality Index (300 highest quality firms from the identical countries) and the MSCI World Growth Index (603 highest growth firms) over the periods indicated.
Figure 2: Quarterly, annual, five-year and ten-year returns of the MSCI World Quality Index relative to the MSCI World Index (December 31, 2008 – September 30, 2025). The longer the timeframe, the more quality outperformed the MSCI World Index.
Source: MSCI, CCLA. The above data just isn’t annualized. Past performance just isn’t a reliable indicator of future returns. The value of investments can fall in addition to rise.
The data for Figure 2 above is presented in Table 3 below.
Column 1 of this table shows absolutely the performance of the MSCI World Quality Index, which consists of firms with high returns on equity, stable year-on-year earnings growth and low leverage for the quarters ending on the dates shown. Banking giant JPMorgan, for instance, just isn’t included within the MSCI World Quality Index because, like many banks, it has high levels of debt.
Column 2 shows the relative performance of the MSCI World Quality Index versus the MSCI World Index. Column 3 shows the relative performance of the MSCI World Quality Index versus the MSCI World Growth Index. The MSCI Growth Index tracks stocks with high growth rates in sales, earnings per share and retained earnings. These include, for instance, Nvidia and Microsoft, but not Facebook parent Meta, as Meta’s growth is relatively low.
Columns 4 through 6 of Table 3 show the identical absolute and relative performance but for the one-year period ending on the desired date. Columns 7 to 12 show the identical data for five-year periods and 10-year periods, respectively.
Table 3: Quarterly, annual, five-year and ten-year performance (2008-2025). The longer the timeframe, the more quality stocks have outperformed the broader stock market and growth stocks.
The left side of Table 3 is a patchwork of reds and greens, as quality stocks underperform and outperform in a pattern that’s difficult to predict from quarter to quarter. In contrast, the appropriate side is generally green, showing that quality stocks have outperformed the broader market over an extended time horizon.
The bottom row of column 11 in Table 3 above shows that the MSCI World Quality Index has outperformed the broader MSCI World Index over all 10-year periods since 1998. This is a remarkably consistent performance. Figure 4 shows this performance in a line graph.
Figure 4: Historical outperformance of the MSCI World Quality Index versus the MSCI World Index (December 31, 1998 – September 30, 2025). Over longer periods of time, quality stocks have increasingly outperformed the broader stock market.
Source: CCLA, MSCI. Past performance just isn’t a reliable indicator of future results. The value of investments can fall in addition to rise.
Quality as an alternative of growth
Quality stocks also outperformed (currently popular) growth stocks the longer they were held, in 85% of quarters over a 10-year time horizon. Structural crises have only rarely upset this regularity. For example, quality stocks underperformed growth stocks for six quarters in 2021-22 as investors invested in growth stocks like Peloton and Zoom throughout the Covid pandemic and lockdowns.
In the quarters where the 10-year performance of quality stocks underperformed growth stocks, quality stocks delivered 10-year absolute returns between 178% and 335%, which is hardly a significant problem from a performance perspective.
The bottom row of column 3 in Table 3 is especially interesting. The 49% (circled) shows that growth stocks outperformed quality stocks barely more often on a quarterly basis. Still, the standard outperformed when using the identical returns over an extended time period, e.g. B. five or ten years, the expansion occurs 69% of the time (column 9) and 85% of the time (column 12).
Permanently
Why this paradox between minor underperformance within the short term and significant outperformance in the long run?
Basically, during market crises over the past 25 years, the costs for quality stocks fell lower than the general market or the costs for growth stocks. During the worldwide financial crisis, for instance, quality index prices fell by a 3rd from peak to trough and recovered in only over three years. In contrast, growth stock prices fell greater than 40% and took greater than five years to get better, as shown in Figure 5 below.
Figure 5: MSCI indices during and after the worldwide financial crisis (2007-2009). The prices of quality stocks fell less sharply and recovered more quickly than other categories of stocks.
Source: CCLA, MSCI. The above data just isn’t annualized. Past performance just isn’t a reliable indicator of future returns. The value of investments can fall in addition to rise.
Additionally, quality stocks have what some scholars call “consistent returns.” When they outperformed, they did so over longer periods of time, amplifying their positive returns.
Finally, quality stocks and growth stocks have different return characteristics. For example, as of September 30, 2025, the dividend yield of the MSCI World Quality Index was 1.25%, almost twice that of the MSCI World Growth Index (0.69%). This difference in dividend yield signifies that for growth stocks, share price growth is the dominant source of investment returns. In contrast, the performance of quality stocks will depend on each share price growth and dividends. In other words, investing in quality stocks offers a more diversified return than investing in growth stocks.
The investment manager’s perspective
As energetic portfolio managers with a high quality orientation, we don’t just deal with a high quality benchmark. Instead, we’ll deal with why these quality firms have their special characteristics. This includes assessing their competitive advantage and the event of their growth prospects. At the identical time, we wish to avoid quality firms whose prices are so high that they risk hurting investor returns in the long run in the event that they lose value.
It isn’t easy for an investment manager to keep on with a long-term strategy when short-term results favor other approaches. We never stop refining our approach, but stay true to core principles which have stood the test of time.
Our customer advisors play a crucial role on this. They are crucial in helping clients understand the difference between the short-term and long-term dynamics of the stock market. Fortunately, a lot of our clients have a long-term perspective that’s well covered by investing in quality stocks.
A decade within the making
Different investors have different investment horizons, which can require different strategies. If history is any guide, patience is the worth to pay for superior quality in the long term. It is crucial that investors be realistic about their time horizon when selecting to take a position in quality stocks.
