The most reliable warning signal in the U.S. stock market has been triggered! Both previous flashes were followed by major bear markets

A key indicator that has tracked the U.S. stock market for nearly 70 years is now flashing a rare warning.

The "Quality Minus Junk" (QMJ) factor—which measures the relative performance of high-quality stocks versus junk stocks—abruptly reversed in July of this year after the longest and deepest junk-stock outperformance cycle on record. And every similar reversal in history has heralded the arrival of a major bear market.

In July, the QMJ factor posted its largest single-month gain since records began in 1957, rising 14.3%. Meanwhile, Goldman Sachs' basket of unprofitable tech stocks fell 11% in the third quarter, while high-quality consumer staples such as Procter & Gamble and Coca-Cola staged a strong rebound. F. Porter Stansberry, founder of investment research firm Porter and Company, warned that this signal means "it's time to be cautious."

Historical data shows that the second- and third-largest single-month gains in the QMJ factor occurred in November 2000 and October 2008, respectively—both on the eve of major bear markets. The current junk-stock bubble, driven by the AI boom, is already the largest in AQR's nearly 70 years of data, and the market shock from its bursting should not be underestimated.

The Largest Junk-Stock Bubble in History: A Three-Year Outperformance Driven by AI Frenzy

The cycle of junk stocks outperforming quality stocks began in November 2023 and lasted through June 2026, setting records for both duration and magnitude.

During this period, a portfolio that went long the highest-quality U.S. companies and shorted the lowest-quality ones lost a cumulative 36%—the worst performance for the QMJ factor since records began in 1957. The 12 months ending in May 2026 marked the worst 12-month stretch for quality stocks in the entire 69-year record. Quality stocks posted losses for three consecutive years in 2023, 2024, and 2025, and fell another 3.8% in the first eight months of 2026.

The core driver of this phenomenon is investors' frenzied pursuit of artificial intelligence technology. According to Bloomberg data, Goldman Sachs' basket of unprofitable tech stocks rose 57% in the first five months of 2026, while the S&P 500 gained only 11% over the same period. The Russell 2000, a small-cap index in which unprofitable companies account for more than a quarter of constituents, rose 22.7% in the first half of the year—more than double the gain of the broader market.

Stansberry characterized the phenomenon as a "tech-driven junk-stock bubble" and noted that it is the largest on record.

The QMJ Factor: A 69-Year Yardstick for Tracking Market Rationality

To understand this warning signal, one must first understand the construction logic and historical background of the QMJ factor.

The QMJ factor was introduced in 2013 by Cliff Asness, founder of AQR Capital Management, together with colleagues Andrea Frazzini and Lasse Heje Pedersen, and the related paper was published in the Review of Accounting Studies in 2019. Asness studied under Nobel laureate Eugene Fama, whose research demonstrated that markets are efficiently priced most of the time.

The QMJ factor defines "quality" as three categories of characteristics for which investors should pay a premium: profitability, growth, and safety. Profitability is measured using six different indicators; growth tracks the change in earnings per share over the past five years; and safety combines a stock's volatility relative to the S&P 500 (beta), two balance-sheet soundness models—the Ohlson O-Score and the Altman Z-Score—and the volatility of return on equity over the past five years.

Each month, the factor scores and ranks all publicly listed U.S. stocks, going long the top 30% (quality stocks) and short the bottom 30% (junk stocks), weighted by market capitalization and rebalanced monthly. AQR's published U.S. data dates back to July 1957. Notably, the QMJ factor does not consider valuation at all—it measures quality alone.

Over the long run, from July 1957 to August 2026, quality stocks outperformed junk stocks by 3.6% per year, demonstrating that the market systematically underprices quality.

Historical Pattern: After Junk-Stock Bubbles Burst, Bear Markets Often Follow

AQR's historical data reveals a clear pattern: cycles in which junk stocks dramatically outperform quality stocks often end with sharp market corrections—but only when the phenomenon is driven by investor frenzy rather than a bear-market rebound.

Since 1957, the QMJ factor has experienced eight downturns exceeding 10%. Among them, three typical cases were driven by technological innovation frenzies: the electronics and computer boom of the 1960s, the internet bubble of 1999, and the 2020 boom in electric vehicles, cryptocurrencies, and remote work.

Within two years after each of these three bubbles burst, quality stocks outperformed junk stocks by 28%, 68%, and 41%, respectively; over the same periods, the overall stock market returned -4.5%, -23.5%, and +6.4% (the last was positive because it was measured from the low base after the COVID-19 crash).

By contrast, there are also "benign" instances of junk stocks outperforming quality stocks—namely, after major bear markets, when central banks inject liquidity on a massive scale, allowing weak companies on the brink of bankruptcy to survive and their share prices to rebound sharply from the bottom. The data from the 1970s, 1992, 2002, and 2009 all fit this pattern.

The current cycle clearly does not belong to the latter category. The S&P 500 has continued to hit record highs during this period, and junk stocks' outperformance has been driven entirely by the AI boom, rather than by cheap valuations or a bear-market rebound.

The Style Shift Has Begun: Quality Stocks Stage a Strong Comeback

Signals of a market style shift have already appeared—and they are arriving fast.

In July, the QMJ factor rose 14.3% in a single month, the largest monthly gain since 1957. Goldman Sachs' basket of unprofitable tech stocks fell 11% in the third quarter, while highly speculative individual stocks that had previously outperformed the broader market by a wide margin were hit hard: AST SpaceMobile (ASTS) fell 56%, and D-Wave Quantum (QBTS) fell 52%.

Meanwhile, high-quality consumer staples stocks staged a strong rebound. Since June 30, Procter & Gamble (PG) has risen 12.9% and is on track for its best monthly performance since October 1998; Coca-Cola (KO) has risen 17.3%; Church & Dwight (CHD) has risen 12.4%; and Colgate-Palmolive (CL) has risen 6.2%. Over the same period, the S&P 500 gained just 2.3%.

Stansberry noted that the second- and third-largest single-month gains in the QMJ factor occurred in November 2000 and October 2008, respectively—both on the eve of major bear markets. This historical parallel makes the current market signal all the more worth heeding. For investors, tilting toward high-quality, highly profitable companies may be the more prudent choice in the current environment.