U.S. Quality Factor Gains 14.3%, Its Biggest Month Since 1957

The U.S. quality-minus-junk stock factor rose 14.3% in July 2026, its biggest monthly gain in records since July 1957, reversing a record stretch of lower-quality stocks outperforming.

That record stretch ran from November 2023 through June 2026, when the long-quality, short-junk portfolio lost 36%, its worst performance in a 69-year record. Lower-quality stocks' outperformance was fueled in part by enthusiasm for artificial intelligence.

The factor ranks U.S.-listed companies on profitability, growth and financial safety. It takes long positions in the highest-scoring 30% of stocks and short positions in the lowest-scoring 30%, with market-value weighting and monthly rebalancing. The measure does not include valuation.

Its profitability score uses six measures. Growth is assessed through five-year changes in earnings per share, while financial safety includes stock volatility, balance-sheet tests and five-year volatility in return on equity. The U.S. record begins in July 1957.

Cliff Asness, Andrea Frazzini and Lasse Heje Pedersen proposed the factor in 2013. Their research paper was published in 2019.

Other measures of market performance showed weaker companies gaining ground earlier in 2026. A Goldman Sachs basket of unprofitable technology stocks rose 57% in the first five months of the year, while the S&P 500 gained 11%. The Russell 2000 was up 22.7% in the first half of 2026. The Goldman Sachs basket fell 11% in the third quarter of 2026.

Three earlier technology-driven speculative cycles involved 1960s electronics and computers, the 1999 internet boom, and the 2020 surge in electric vehicles, crypto and remote work. In the two years after each bubble burst, quality stocks beat lower-quality peers by 28%, 68% and 41%, respectively.

Since 1957, the factor has had eight declines greater than 10%. Other periods when lower-quality stocks led included the 1970s, 1992, 2002 and 2009, following major bear markets and central-bank liquidity injections. Across the full record through August 2026, quality stocks outperformed lower-quality stocks by an average of 3.6% a year.