How I Made $5000 in the Stock Market

AI Is Punishing Quality Stocks. They’re About to Fight Back.

Oct 16, 2025 14:30:00 -0400 by Paul R. La Monica | #Markets #Barron's Take

Apple is a quality stock that is struggling. (Annice Lyn/Getty Images)

Key Points

Cream rises to the top, except on Wall Street this year.

Companies with solid fundamentals—so-called quality stocks—are limping along behind the momentum plays that traders find hard to resist. And it’s easy to understand why. AI, quantum computing, and crypto aren’t shiny new toys—but they’re shiny enough.

Just wait, though. Quality stocks are going to find their footing and start climbing again.

The past 12 months have been humbling for exchange-traded funds made up mostly of quality stocks. They’ve trailed the broader market indexes, which have significant exposure to tech and AI through the Mag Seven and Broadcom.

The iShares Edge MSCI USA Quality Factor ETF, for example, is up just 5.3%, compared with a 13.1% gain for the S&P 500 and the Nasdaq’s 22.2% jump. The Invesco S&P 500 Quality ETF has gained a better-but-still-modest 7.7% since October 2024.

Now, the quality ETFs do own tech and AI names—the Mag Seven’s Nvidia, Microsoft, and Meta Platforms, as well as Caterpillar, the Dow’s best performer this year and a stock that Barron’s considers a stealth AI play because it manufactures generators for AI data centers.

But the quality ETFs also have large positions in several market laggards, such as Apple, Visa, Mastercard, Costco, Procter & Gamble, and Eli Lilly —all companies with strong earnings and returns on equity, low debt loads, and lots of cash.

There’s another adage that speaks to quality stocks, one from football great Vince Lombardi. To paraphrase, it isn’t about getting knocked down, it’s about getting back up.

BTIG’s Jonathan Krinsky thinks quality stocks are going to catch up with the rest of the market—soon. These companies have dropped so much that they simply will rise. History has shown it to be so time and again. It’s a well-known market principle called reversion.

“Quality remains a laggard,” writes Krinsky, managing director and chief market technician at BTIG. “That in and of itself isn’t an issue, but the extreme nature of these moves suggest reversion is likely.”

A few quality tech stocks have already rebounded—and they still look attractive.

Tech stalwarts IBM, Cisco Systems, and Dell are likes for Michael Sheldon, a senior portfolio manager at Washington Trust Advisors.

“They were left by the wayside but are finding their legs again,” Sheldon told Barron’s. “And they have good fundamental growth.”

These three stocks have all rallied this year but valuations remain relatively attractive. Dell and Cisco trade for 14 and 16 times 2026 earnings estimates, respectively; IBM is valued at 23 times next year’s profit forecasts.

Sheldon would rather own reliably growing tech stalwarts instead of trendy ones—space exploration and quantum computing, to name two.

“We stay away from fringe areas. They are a little speculative,” he said. “They may play out over five to 10 years, but we’re looking instead for companies with strong revenue and cash flow now.”

In that case, companies in more mature sectors that don’t have as much to prove are plays to consider.

L. Joshua Wein, a portfolio manager for the Hennessy Cornerstone Growth Fund, likes financial services and consumer staples. Two top holdings are commodities brokerage firm StoneX and wholesale club retailer BJ’s.

Both are better bargains than the AI giants. StoneX trades for just 14 times 2026 earnings estimates and BJ’s has a forward price-to-earnings ratio of 20.

So don’t be surprised to see these and other quality stocks gain some momentum.

“Tech has a lot of growth and margin expansion,” Wein told Barron’s. “But a lot has to go right.”

Write to Paul R. La Monica at paul.lamonica@barrons.com