Quality factor lags in an AI-driven market exaggeration phase
Staying with quality compounders through underperformance beats switching into momentum at the peak of speculation
In 2026, quality is the worst-performing equity factor while AI-linked names soar and risky stocks trade at highs versus the S&P 500 as safer names hit relative lows. The setup mirrors 1998–2000, when the Nasdaq rose sharply while quality-oriented holders such as Berkshire and Fairfax lagged badly before outperforming after the bubble. Short-term prices vote on sentiment; long-term they track intrinsic value and rising free cash flow from durable moats, healthy balance sheets, and growing earnings. Chasing ETFs and momentum after a extended run risks locking in the wrong strategy at the wrong time.
| Instrument | Side | Target | Reason |
|---|---|---|---|
| BRK-B | Long | We believe that when speculative factors dominate, businesses with durable cash generation, conservative financing, and long compounding track records tend to regain relative performance after euphoria fades, consistent with how quality-oriented compounders recovered following prior tech bubbles. |
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