Quality stocks poised for a rebound

After a historic slump, quality stocks should make a comeback this year, says Ryan Diamant, client portfolio manager, CIBC Asset Management.

In a Dec. 23 interview, Diamant said quality stocks — which he defined as companies with strong margins and profitability, lower leverage, and high returns on invested capital — significantly underperformed the broader market in 2025 after outperforming all other factors for the past decade.

“The reason behind its underperformance was [that] it was fairly expensive […] and started to sell off,” he said. “This continued into 2025, and so we found ourselves in the situation where we are today.”

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

Diamant said this is all set to change this year as the broader market recovers, he said.

“In particular, the eurozone is expected to outperform growth expectations, especially where we were a few months ago. They have certainty in terms of where tariffs are going with the U.S., and so they can focus on economic growth going forward.”

Fiscal spending is also rising across the eurozone, led by Germany’s 2025 decision to lift its debt limit to fund defence, infrastructure and energy, he said. And early-stage deregulation in the eurozone is easing years of red tape, a shift that could lift economic activity and support quality companies.

Quality is also more attractively priced, he said. “When you combine that with the fact that quality is expected to grow faster than the broader market throughout the next calendar year, then you get the perfect recipe for success: more attractive valuations, and faster expected EPS growth is typically supportive for stocks in that type of market environment.”

Diamant said international quality stocks are expected to grow 7% to 8%, versus about 4% for the broader market, with European quality at about 10% in 2026.

In identifying quality companies, he said, it is important to analyze softer elements in behavioural finance like management responds to concerns, shareholder alignment and consistent execution over time.

“When you get a bit of a sell-off in a company, we can better assess whether it’s transitory or enduring, and choose to invest,” Diamant said. “And so that company meetings element, plus the early due diligence allows us to avoid those quality traps.”

Diamant is also focused on more concentrated, higher-conviction portfolios, with about 10% to 20% turnover, as well as flexibility across regions and market caps.

One company that meets this criteria is Ferrari, he said. Over the past year, Ferrari has lagged the market, down roughly 20% as of mid-December, driven by slowdown fears in key markets and broader concerns around luxury demand.

“This is the classic example of quality underperforming the market in this type of environment,” Diamant said. “But as I mentioned, growth is expected to pick up as we head into 2026, especially within European markets, and that should help companies like Ferrari.”

Another example is London Stock Exchange Group, he said, which provides trading platforms and financial data in global markets. After acquiring Refinitiv, London Stock Exchange Group sold off in 2025 on fears that AI could disrupt its data business.

“But in reality, a company like London Stock Exchange actually benefits from artificial intelligence,” Diamant said. “It could use developments there to access the vast amount of data it has on its platform and monetize around that.”

So AI should further support its strong free cash flow growth and high returns on invested capital, he said, which are characteristics of a high-quality business.

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.