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Beyond being a familiar adage, “quality over quantity” lies at the heart of quality-based investing. Rather than concentrating on the largest stocks, quality indices systematically tilt toward companies with strong profitability, high earnings quality and robust balance sheets. Over the long term, the S&P 500^® Quality Index has delivered impressive absolute and risk-adjusted returns as a result of tracking fundamentally sound businesses. In 2026, the index is off to a good start, outperforming the S&P 500 by 1.68% as of Jan. 30, 2026.

In this blog, we’ll explore the key selection metrics behind the S&P 500 Quality Index, review its long-term and YTD performance, and analyze its current constituent makeup.

Methodology Overview

The S&P 500 Quality Index uses three key metrics: return on equity (ROE), balance sheet accruals ratio (BSA) and financial leverage ratio (FLR). These metrics are combined into an overall quality score, which is used to select the top 100 stocks within the S&P 500. Selected constituents are then weighted based on the product of their market capitalization and quality scores.¹

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Long-Term Outperformance

Over the long term, including back-tested results, the S&P 500 Quality Index has delivered robust performance, outperforming The 500^® by an annualized 256 bps (13.71% vs. 11.15% annualized return) since Dec. 16, 1994, while also exhibiting 87 bps lower risk (17.97% vs. 18.84% annualized volatility).

In contrast, the S&P 500 Quality – Lowest Quintile Index—representing the lowest quality quintile—has underperformed the S&P 500 by an annualized 180 bps over the same period (9.35% vs. 11.15% annualized return), while exhibiting a materially higher risk of 320 bps (22.04% vs. 18.84% annualized volatility). Together, these results highlight the pronounced performance divergence between high- and low-quality stocks (see Exhibit 2).

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Outperformance YTD in 2026

Resilient U.S. economic growth and lower U.S. Federal Reserve rates have bolstered corporate earnings across a broad range of companies, extending well beyond the “Magnificent 7.” This environment has encouraged wider market participation and supported the S&P 500 Quality Index’s YTD outperformance.

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Sector Weights

Currently, the S&P 500 Quality Index underweights the Communication Services and Information Technology sectors, while overweighting Industrials and Consumer Staples sectors, relative to The 500 (see Exhibit 4).

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Reduced Weight in the Magnificent 7

The current AI hyperscaler buildout marks one of the largest capital investment cycles in modern equity markets. Although these investments may fuel long-term growth, they have rapidly expanded companies’ non-cash assets^{2, 3} (see Exhibit 5), which in turn has affected quality metrics such as balance sheet accruals and leverage. Consequently, the Magnificent 7 account for only 4.9 % of the S&P 500 Quality Index as of Dec. 31, 2025.

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Conclusion

The S&P 500 Quality Index has demonstrated resilient characteristics over the long term. By systematically selecting companies based on strong profitability, superior earnings quality and robust financial health, it has historically outperformed in absolute and risk-adjusted terms. In today’s market, its disciplined methodology may help navigate concentration risk, offering a distinct lens from traditional market-cap-weighted approaches.

¹ Please refer to S&P Quality Indices Methodology for more details.

² Non-cash assets include net PPE, short-term receivables, total long-term investments and inventories

³ For Microsoft, the current fiscal year (CFY) shown ended in June 2025; for Alphabet, Meta and Amazon, the CFY ended in December 2024; for Nvidia, the CFY ended in January 2025.

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