Earnings Bounce Poses Quality Test for Equity Investors

As the world convalesced from the pandemic, stocks advanced in the second quarter and earnings rebounded across sectors. With business gains broadening amid complex market risks, we think investors should lean on quality to find stocks that will perform well in a normalizing world economy.

Global stocks continued to rise in the second quarter. The MSCI World Index advanced 7.6% in the three-month period through June in local currency terms, and was up 14.2% since the beginning of the year. US and Australian stocks led the gains, while emerging markets and Japan underperformed (Display, left). Technology was the top performing sector again after a relatively weak first quarter. (Display, right). Real estate stocks staged a robust rebound from last year’s underperformance, helped by growing evidence that the sector’s worst-case outcomes are less likely post-pandemic.

Two bar charts show regional stock market returns and MSCI World sector returns for the second quarter 2021.

The global economy is progressing through the reopening phases in fits and starts. Some countries have seen rapid progress in containing COVID-19 through successful vaccination programs, while others faced setbacks as new variants emerge. Similarly, in equity markets, style leadership was volatile. Value stocks have been the best performing strategy this year, but lagged in the second quarter (Display). In fact, quality stocks—typically the most consistent performers through cyclical changes—performed well in the second quarter and through the rotation from growth’s dominance in 2020 to value’s reawakening.