Seven charts showing quality is down - but not out
Since April’s ‘Liberation Day’, investor sentiment has bounced back quickly and strongly, across many regions. However, most recent market gains have come from rising valuations, not from improvements in company revenue growth.
As a result, we’re cautious and alert to possible negative surprises ahead.
The end of summer can be weak and volatile months for markets, so staying grounded and true to our principles is vital. We’re watching valuations closely and actively seeking opportunities to reduce concentration risk and reaffirm our quality bias. Here’s the seven charts that support our thinking
Technology is still leading the charge
US tech led returns for investors through July, as excitement about AI continues to grow and, as you can see in the chart below, big company spending in this area shows no sign of slowing. Many investors perceive AI to be insulated from the on-going tariff uncertainty.
Source: Bloomberg and Grizzle.com, June 2025
Investors are taking more risks
Q2 results have held up well but expectations were low. The good results are mainly down to cost cutting and operational efficiencies rather than improved revenues. There are worrying signs of investors taking more risks –at a time when market concentration is high, something it seems many are choosing to ignore.
The resurgence of ‘meme’ stocks, particularly among retail investors, has seen a spike in performance in unprofitable technology companies as excitement around the tech space grows. While this excitement might persist for now, over the medium to long-term a company’s true worth comes from its earnings and growth. Many investors could be heading for disappointment.
Source: Capital IQ and First Trust, July 2025
Concentration risk persists
Outperformance from three of the Mag 7 (Nvidia, Microsoft and Meta) flags continued concern about concentration risk in the S&P 500. The top 10 now makes up about 40% of the index and is dominated by two sectors, technology and communication services, with a correlation close to one. How truly diversified are investor portfolios?
The top 10 contribution to overall S&P 500 risk is now disproportionately high. History tells us this kind of imbalance is unlikely to last forever, so care and selectivity is needed.
Source: DE Shaw and Bloomberg, July 2025
Top 10 sensitivity grows
The sensitivity to the market of the S&P 500 top 10 has grown, and many investors have benefitted as the index has risen. This also works in reverse, if markets fall, investors should be ready and comfortable for that journey. Currently, I’m not convinced they are.
Source: DE Shaw and Bloomberg, July 2025
Quality’s time to shine
Investment style leadership has varied through 2025, with growth, value and momentum typically leading near term returns. Quality has lagged behind, despite its potential to deliver consistent, attractive, risk adjusted returns.
Quality’s lag has been a headwind for a number of our selected managers, but as global growth slows, investors will put increasing value on strong balance sheets, cashflow generation, margin and market share resilience, and steady return on capital employed.
We remain focused on this as a principle and disciplined in our execution because we know that, over the long-term, quality has proven to deliver for investors.
Source: FTSE Russell, July 2025 and CCLA and MSCI, December 2024
More focus on valuations
Markets have performed well so far this year, despite heightened policy uncertainty, geopolitical risk and growing economic challenges. With growth slowing, investors are likely to focus more on valuations, and the picture is mixed.
The US, especially the Mag 7, looks expensive compared to other markets and to their own history because investors expect strong growth. If they can’t meet these high expectations, they could face profit taking and a de-rating.
In comparison, Europe, UK, Emerging Markets and China are more attractively priced, but as you can see in the chart below, they’re trading close to their historical averages, with all markets having risen since the start of 2025.
Source: J.P. Asset Management, 7 August 2025
Diversification matters
In this environment, it’s important to avoid both downside surprise and concentrated positioning, especially where expectations are so high. With equity valuations fair to expensive, credit spreads tight and government bond yields middling, diversification makes sense.
We’re more focused than ever on avoiding concentration risk. Experience has taught us that markets often hit hardest where most people are invested, and when they least expect it. Staying disciplined, sticking to the plan and thinking long-term will help clients cope with the inevitable ups and downs the markets always bring, and keep them invested helping to progress towards their agreed financial objective(s).
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This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.
