US stocks keep grinding higher: what happens next and how to position with quality shares

What Could Change

In terms of the stock market, a few things are possible to shift this dynamic.

Fed stops cutting: Inflation rises sharply, suggesting the Fed was too hasty to resume cutting in September. Leaving the central bank with no more room to cut, investors fret over stagflation.

Recession: The jobs picture in the US really is worse than it seems, the Fed was too late to ease and has to cut interest rates aggressively. This would likely push the market into at least a correction (-10%) and possible spark a new bear market. In 2001 (dotcom) and 2007 (financial crisis) the market bottomed long after the first rate cuts were made. In the dotcom bust the S&P 500 was down over 12% 12 months after the first cut, while in 2007 the broad market remained 22% down a year later. Three years after the 2001 recession cut the market was 14% down, while three years after the financial crisis cut of 2007 the market was 24% lower. 

AI bubble bursts: One bear thesis is that AI is in a bubble and it will burst, causing carnage among stock portfolios as the largest and most liquid assets get sold first.

Late-cycle investing: Positioning potential

Less cyclical, higher-quality shares are favoured in a late-cycle dynamic, such as healthcare and pharmaceuticals.

Pimco uses a system that selects companies based on their valuation adjusted for cash generation. This enables them to find high quality companies that also have good growth and trade at a discount on adjusted multiples. The other things they look for are low debt, high margins and strong free cash flow.

• Stay invested, but be selective: Broad indices can still climb if earnings momentum is solid. Tilting towards quality growth (profitable, strong balance sheets, pricing power) avoids the most speculative parts of the market that get hit hardest when volatility snaps back.

• Sector tilt: Defensives (healthcare, staples) can act as ballast, while cyclical leaders (tech, industrials) may still grind higher if the macro backdrop is stable.

• Bonds / cash-like yields: With rates elevated, you don’thave to chase risk—short-dated Treasuries or gilts can yield 4–5% and provide a solid core if equities stumble.

• Real assets / gold: If the “low vol” regime is partly driven by complacency around inflation or geopolitics, having some commodity or gold exposure hedges against a regime change and can capture upside momentum even if equities suffer.

Late cycle ETFs to consider

A couple of examples of ETFs that focus on quality shares. First the iShares MSCI World Quality Factor UCITS ETF (IWQU), which delivers a tilt to high ROE, stable earnings, low debt. It’s chock full of US tech with Nvidia, Apple and Microsoft its major holdings. The iShares Edge MSCI USA Quality Factor UCITS ETF (IUQA) also delivers exposure to US quality large caps. If you want to cut some US weight and go for European exposure, the iShares MSCI Europe Quality Dividend ESG UCITS ETF (EQDS) is one to consider for income generation.

Real assets – ie commodities: The iShares Diversified Commodity Swap UCITS ETF (ICOM)is a broad commodity basket, while the VanEck Gold Miners UCITS ETF (GDGB) offers straightforward exposure to gold via a non-complex instrument. I looked at investing in gold here.

Tilt to low beta equities: A low volatility ETF offering diversified exposure to developed companies and that seeks to minimise the market's peaks and valleys is the iShares MSCI World Minimum Volatility UCITS ETF (MVOL), which counts AT&T, Microsoft, Duke Energy and Motorola among its main holdings.

Defensive sector ETF: The SPDR MSCI World Health Care UCITS ETF (WHEA) offers global healthcare exposure with the likes of Eli Lilly, Johnson & Johnson, Abbvie and UnitedHealth among its main holdings.
You might also want to consider buffer ETFs, which limit the downside over a given timescale in return for investors agreeing to an upside cap.

If you are thinking a little more defensively, recently I took a look at the Ray Dalio All Weather portfolio.