Key facts
- Piper Sandler recommends quality stocks due to a worsening macro outlook.
- Quality stocks are defined by high free cash flow yield and return on equity.
- Nine large-cap stocks were identified via Piper Sandler's Macro Select model.
- Five ETFs were ranked highest for quality exposure.
- The firm believes quality stocks outperform as markets decline from a peak.
Piper Sandler is recommending a strategy focused on quality stocks, suggesting they are insulated from current market jitters related to artificial intelligence and are poised for further upside. The firm's chief investment strategist, Michael Kantrowitz, noted that the current economic backdrop is conducive to quality themes outperforming, particularly as the market cycle appears to be rolling over from a peak.
The firm defines quality stocks by their high free cash flow yield, return on equity, return on invested capital, return on assets, and high interest coverage, essentially measuring financial health and profitability. This approach contrasts with a lesser emphasis on low debt levels and high dividends, which are common tenets of the quality factor.
Piper Sandler anticipates a worsening macro outlook heading into 2027, with rising interest rates, elevated oil prices, low fiscal spending appetite, and decelerating housing activity, all of which historically favor more stable companies and lower portfolio risk. The firm's Macro Select screener identified nine stocks exceeding $100 billion in market capitalization, including AT&T, T-Mobile US, Marathon Petroleum, Valero Energy, UnitedHealth Group, Lockheed Martin, Uber Technologies, Salesforce, and Southern.
Additionally, investors can gain exposure through ETFs. Piper Sandler screened 20 quality-factor ETFs and ranked them based on profitability, valuation, and earnings momentum, listing the top five as the American Century U.S. Quality Growth ETF (QGRO), Invesco S&P 500 Quality ETF (SPHQ), iShares MSCI USA Quality GARP ETF (GARP), JPMorgan U.S. Quality Factor ETF (JQUA), and Northern Trust US Quality Large Cap ETF (QLC).