GS Soria Higher Rates = Bid for Quality

GS Soria - Higher Rates = Bid for Quality 14 Oct 2026 Guillaume Soria · Goldman Sachs · Vice President, FICC & Equities 14 Oct 2026

The index is near all-time highs, but under the surface the market is rewarding quality. This doesn’t only reflect higher rates, but a shift in focus from growth to the composition of growth. The rate of change of growth should decelerate in the next 12 months in AI and non-AI pockets of the economy, which could be a backdrop that is net positive for quality given the factor tends to outperform as earnings growth rolls over.

Our sector, industry, and factor neutral Quality Pair Index (GSP1QUAL) is up 20% over the last 3 months to a 12m high on just ~13% realized vol. This has been driven by a sharp selloff in the short leg (GSX1BFQS). Quality can also be used as a hedge to AI, momentum or beta exposure given the strong negative correlation to these crowded themes (Momentum positioning is 78th percentile on 5y and Beta is 81st of 5y).

We continue to favor quality (GSP1QUAL), Defensives over Cyclicals (short GSPUCYDE), and like shorting long duration pockets like Low Quality Equities (GSXULOWQ), which offers a cleaner rates expression than higher-beta alternatives (GSX1NPTC). The same quality bias is emerging within AI. Mag- 7 net positioning is now at the highs and these megacaps continue to hold in while lower-quality AI has been repriced. Worth noting this dynamic has led hyperscalers (GSXUHYPR) to materially outperform their own credit (GSUCHS30).

However, technicals are now stretched in the Quality Factor (GSP1QUAL) with an RSI of 83 after being up in 16 of the last 18 trading sessions. A softer CPI print or evidence that rates are peaking could trigger a reversal and a relief rally in the longer duration lower-quality names: GSX1BFQS 1m 105% call indicatively costs 1.38%, 25d.

Quality has had one of its strongest periods of outperformance and is at 12m highs

Source: Goldman Sachs FICC & Equities, Bloomberg, as of Oct 2026. Past performance is not indicative of future results.

This flight to quality has been a function of higher rates being priced in

Source: Goldman Sachs FICC & Equities, Bloomberg, as of Oct 2026. Past performance is not indicative of future results.

The move has been driven by the strong underperformance of the short leg (Lower quality)