Large cap stocks start to struggle – is it time for investors to reassess their focus?

Buying quality large caps worked very well last decade. A more volatile world will be a bigger challenge for these star stocks, says Cris Sholto Heaton

Stock exchange graph showing stocks struggling
(Image credit: Getty Images)

One of the best strategies during the last market regime was to buy quality large caps, as epitomised by Terry Smith. Quality is rather a flexible concept in investment – most people prefer to say they hold good businesses rather than trash – but broadly this meant companies with high return on equity, low leverage, and steady earnings that produce reliable cash flows and strong global growth prospects.

A decade ago, quality investors favoured areas such as consumer staples – often developed-market firms with exposure to emerging markets. Later, some of these stocks started to struggle amid slower emerging-market growth and the return of inflation after the pandemic, while the tech sector began to lead markets. So quality investors shifted a little towards software or data services, where the best businesses have steady recurring revenue, low capital intensity and the ability to lock in loyal customers.

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Cris Sholto Heaton

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.