Although Stocks Were Volatile During the First Quarter, High Quality Has Come Back Into Favor

From late 2021 through most of 2022, energy stocks and other value- oriented names were some of the best performers—but so far in 2023, dynamic growth companies have regained their status as market leaders.

After a poor showing in 2022, high-quality growth stocks got off to a strong start in January 2023. Then, in February, stocks sold off based on concerns regarding overheated economic activity, stubbornly elevated inflation, and persistent interest-rate hikes by the U.S. Federal Reserve (Fed) and counterparts around the world. In March, a few well-publicized bank failures worsened market sentiment—causing stocks to slip further.

Nevertheless, investor sentiment improved toward the end of March and U.S. small-cap growth stocks, as measured by the Russell 2000® Growth Index, finished the first quarter of 2023 in positive territory. For the most part, small-cap growth stocks also performed well internationally in both developed and emerging markets. Moreover, the Wasatch-specific approach to high-quality growth investing was generally favored.

In a broad sense, Wasatch defines high-quality growth companies as those having innovative products, services and business models, increasing market share, great management teams, significant returns on capital, relatively low debt and the ability to self-fund expansion. Another element of our approach to quality-oriented investing is that we often attempt to identify excellent companies before high quality is evident in their financial results. If we do this well, stock-price appreciation can be particularly strong.