Quality stocks have lagged. History says that's when to buy

Quality stocks have been underperforming, but if history is any guide, quality outperformance will be right around the corner.

This is the belief of Kent Hargis of AllianceBernstein, who argues that today’s environment represents an unusually attractive entry point into high quality franchises trading at compelling valuations.

“Our historical analysis suggests that periods of pronounced quality underperformance have typically been followed by quality outperformance in the subsequent market cycle. We believe this is an attractive point to increase exposure to high-quality franchises with compelling return profiles and valuations.”

Hargis outlines two dominant drivers for today’s global equity markets: Middle East geopolitical tensions, and the technological disruption from AI.

Together, they are reintroducing inflation risk, driving volatility, and concentrating market leadership in a narrow group of stocks, creating a more complex and arguably more fragile environment for portfolio construction.

Hargis has a clear response to the confusion – a return to fundamentals. His argument is not that the risks are overstated, he believes they are very much real, but that the market’s reaction has created a rare pricing anomaly. Quality and low-volatility stocks underperforming simultaneously is something that hasn’t occurred in decades, and Hargis sees this as an opportunity.

In the following Q&A, Hargis explains how he is navigating today's market, where he sees mispricing across global equities, and how his portfolio is being positioned to capture what he believes is an emerging opportunity.

Geopolitics and AI: the two forces reshaping the investment landscape

Hargis identifies two dominant forces driving global equity markets right now: Middle East geopolitical tension and AI-driven technological disruption. The escalation of conflict involving the US and Israel has sent energy prices spiking and reintroduced meaningful volatility into both stock and bond markets.

"A prolonged disruption in energy supply could fuel inflation, disrupt global central bank monetary policy, hurt economic growth and weigh on corporate margins."

In this environment, he argues, companies with pricing power and lower sensitivity to economic growth are best placed to hold up.

When it comes to AI, Hargis argues the market's response has been far from precise. Infrastructure companies are benefiting, but software and information services firms have been broadly sold off regardless of whether they are genuinely vulnerable or well positioned to monetise AI, and he believes that indiscriminate selling has created its own opportunity.

"The market has not distinguished between resilient and disrupted companies."

His portfolio focuses on businesses with proprietary data embedded in enterprise workflows that are actively monetising AI, which he believes have been oversold, while avoiding speculative growth names without clear return pathways.

Valuations and the case for looking beyond the US

A key risk Hargis highlights is concentration, particularly in US equities. While many investors continue to crowd into the same names, he sees better opportunities elsewhere.

“We think US equities remain expensive versus global peers. Regional diversification isn’t just a risk-control tool – it’s a source of differentiated returns to help fight concentrated leadership."

He points to Europe and Japan as areas where structural improvements, including capital discipline and corporate governance reform, are creating attractive, less correlated return opportunities.

More broadly, he emphasises the importance of diversifying across regions, sectors and business models to reduce reliance on a narrow set of market leaders.

The three pillars behind the investment philosophy

At the core of Hargis’s strategy is a disciplined framework built around three pillars: quality, stability and price.

Quality refers to companies with strong profitability and consistent cash flows.

Stability comes from recurring revenue and predictable earnings patterns.

Price ensures investors avoid crowded trades that may reverse.

"Companies that produce predictable earnings patterns tend to outperform the market with better risk characteristics and attractive prices. It is important to avoid crowded trades that may reverse.”

This philosophy is implemented through a combination of fundamental and quantitative analysis, allowing the team to identify and avoid stocks with elevated idiosyncratic risk. The result is a portfolio designed to generate returns while controlling volatility and providing diversification relative to traditional equity strategies.

Why quality underperformance is the opportunity hiding in plain sight

The simultaneous underperformance of quality and low-volatility stocks is, in Hargis’s view, highly unusual. This has been driven by AI enthusiasm, policy uncertainty and concerns around disruption, particularly across software and information services. Despite this, he remains confident the long-term drivers of returns remain intact.

“Short-term lapses in quality stock performance don’t signal a fundamental erosion of long-term potential.”

Historically, such periods have been followed by strong recoveries in quality. With macro conditions uncertain and fewer policy levers available to support growth, Hargis believes companies with resilient earnings and strong balance sheets will become increasingly valuable.

He also pushes back on the idea that AI investing begins and ends with the mega-caps. The opportunity set is far broader, and investors focused only on the hyperscalers are, in his view, missing a significant portion of the value being created.

"We think investors should search beyond the mega-caps across the entire AI ecosystem for future winners, from early enablers to semiconductor suppliers and software firms building new architectures. Opportunities will also emerge among a broader range of companies that will become consumers and beneficiaries of AI."

He is not dismissive of the mega-caps, but insists they should be held selectively based on rigorous assessment of business models and valuations rather than index weight. He draws on history for perspective.

"We have been through technological disruptions before. Recall almost a decade ago when Amazon was going to disrupt grocery, drug distribution and auto retail. Walmart, McKesson and Autozone have been among the best stock performers in our portfolio. It is in our DNA to identify winners in the face of technological disruption."

Where the portfolio is moving, and what's been cut

Hargis’s portfolio reflects a deliberate effort to capture AI-driven upside while avoiding areas most exposed to disruption risk. The focus is on infrastructure beneficiaries and companies enabling electrification and data centre expansion, rather than speculative growth.

On the buying side, positions have been increased in NextEra Energy (NASDAQ: NEE), which is pivoting to an “all-forms-of-energy” model combining renewables, storage and nuclear to meet AI’s 24/7 power demands.

Schneider Electric (EPA: SU) was also increased, given its end-to-end data centre capabilities across design, power, cooling and monitoring with data centres estimated to represent 24% of total orders in 2025.

On the selling side, software exposure has been reduced significantly. Microsoft (NASDAQ: MSFT) has been trimmed following weaker momentum in Azure and Copilot monetisation, while Constellation Software (TSX: CSU) was exited and Intuit (NASDAQ: INTU) was reduced. Software exposure has been cut to the lowest level in the strategy's history, with the team applying a moat-based framework – informed by customised versions of Porter's Five Forces – to determine what remains.

“We exited names where we see meaningful disruption risk and retain only the highest-quality, most durable franchises.”

The result is a portfolio Hargis believes is positioned to participate in AI-driven growth while managing the downside risks of disruption and overvaluation. The strategy is now also accessible via an active ETF on the ASX - AB Global Strategic Core Equities Fund (CBOE: SCOR), offering daily holdings transparency, intraday liquidity and lower fees than traditional active vehicles.

Managed Fund

AB Global Strategic Core Equities Fund – Active ETF

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