European Q-Score quantitative equity strategy Report Interpretation

Overview

This monthly European equity quantitative strategy update reviews Q-Score performance, style rotation, stock-screen changes and alternative model extensions. JPMorgan argues that its diversified Value, Growth, Momentum and Quality framework remained resilient through July's Momentum sell-off, while a new Momentum composite offers promising backtested risk control.

Core views

July was constructive for the European Q-Score despite a noisy macro backdrop. European equities rose 1.8% and the Q-Score gained 2.0% on a long/short basis. JPMorgan attributes the result to a change in style leadership as its QMI shifted from Recovery to Contraction: Momentum unwound by 7.3% long/short, whereas Quality gained 2.9% and Value gained 4.7%. Factor-return dispersion widened to 11.7% long/short, which the report interprets as a meaningful separation between winners and losers rather than simple noise. Quality, previously a year-to-date drag, became a contributor in this environment. For August, the model increased conviction in Technology as ASML joined the Bulls, while Financials and Industrials tilts fell after UBS and 3i Group, and Siemens Energy, respectively, exited the Bulls. The model's largest sector extremes remain between Health Care and Industrials. Its aggregate country model favours the Netherlands and Switzerland and places Germany and Italy at the unattractive end; its regional calls are long Emerging Markets and Asia ex-Japan and short Europe, North America and Japan. At the sector level, the report lists Consumer Discretionary, Consumer Staples, IT and Real Estate as preferred, versus Energy, Financials, Industrials, Materials and Communication Services. The report tests replacing the standard Momentum input with a new composite while holding the Q-Score universe, Value, Growth and Quality components, weights, ranking and rebalancing rules unchanged. The new measure combines technical momentum—volatility-adjusted 12-minus-1-month momentum, three-month momentum and high-to-price momentum—with fundamental momentum from six-month earnings momentum and three-month net cash-flow revisions. In the long/short backtest, annual return rose from 11.5% to 12.6%, annual volatility fell from 12.2% to 11.1%, Sharpe improved from 0.94 to 1.14, hit rate rose from 62.7% to 64.7%, and maximum drawdown nearly halved from -34.9% to -19.3%. Monthly turnover declined from about 30.8% to 25.4%. JPMorgan argues that the improvement is mainly a short-side and stress-regime result. Long-only performance was more mixed: the new leg added roughly 0.5% of annual return and improved the hit rate but had higher noise and a deeper worst drawdown, largely attributable to the pre-2010 sample. The new composite reduced one-month holding spells from 47% to 41%, increased 7–12 month spells from 8% to 11% and 13-month-plus spells from 4% to 5%, and extended average holding duration from 3.2 to 3.9 months. The standard model generated 9.4% of long/short return from one-month cohorts, versus 5.6% for the new model; the new model generated 3.3% from 13-month-plus holdings versus 1.9%. JPMorgan therefore sees less reliance on transient "flicker" names and better drawdown control, but will retain the incumbent Momentum signal because of its long live track record. The Q-Score itself is an equal-weight, sector-neutral composite of Value, Growth, Momentum and Quality within the MSCI Europe universe, with rank 1 most attractive and rank 100 least attractive. The report's historical backtest of the Q-Score shows 13.9% annualised pre-cost long/short return, a 67.8% hit rate, 4.4% average information coefficient, t-statistic of 5.90, Sharpe ratio of 1.28 and maximum drawdown of -26.0%. JPMorgan says high-score portfolios historically trade at lower P/E than low-score portfolios and combine inexpensive valuations with stronger fundamentals. It also reports positive long/short performance in Expansion, Slowdown, Contraction and Recovery phases, with the highest reported long/short result in Contraction at 2.08. Among monthly stock changes, Investor improved from Q-Score rank 69 to 5, led by an 84-rank Momentum improvement; ASML improved from 24 to 6, driven by stronger forward earnings momentum and three-month net EPS revisions, though valuation is identified as the key concern; and Safran improved from 25 to 4, supported by Momentum and an already strong Growth rank. The report added 14 names to the Bulls—Industrivarden, Lufthansa, Vodafone, Safran, Airtel Africa, Investor, Rexel, Next, Imperial Brands, ASML, Millicom International Cellular, Mapfre, Var Energi and Repsol—and eight to the Bears: CSG NV, BKW AG, Swiss Prime Site, Hensoldt, Diageo, Aker BP, Solvay and ASR. The report also describes extensions. Its ML Q-Score uses a 100-tree Random Forest to dynamically assess factor importance; the latest signal emphasizes 90-day historical volatility, one-month price reversion, forward P/E and 12-month price momentum, indicating that Risk and Momentum are currently important for predicting returns. The Human Capital Factor combines private HR surveys and public data across seven culture and motivation dimensions; blended equally with Q-Score in sector-neutral long/short baskets, it is intended to improve consistency, valuation discipline and drawdown control. JPMorgan further states that ESGQ combined with Q-Score produced the highest returns and Sharpe ratios in its European ESG comparison.

Analysis framework

JPMorgan first reviews monthly factor and sector performance, then interprets the results through its economic-cycle signal. It compares standard and alternative Momentum inputs in a controlled backtest, holding all other Q-Score settings fixed, before presenting stock, country, sector and industry screens. The report also applies machine learning, human-capital and ESG overlays as complementary systematic selection tools.

Methodology notes

• Quantitative, Factor, and Portfolio TheoryMulti-factor model

  Equal-weight, sector-neutral Q-Score combining Value, Growth, Momentum and Quality percentile ranks within MSCI Europe.

  The model ranks stocks on four distinct return drivers and combines them to identify relatively attractive and unattractive names while reducing dependence on a single style.

• Quantitative, Factor, and Portfolio TheorySharpe and Information Ratios

  Backtest evaluation using annual return, volatility, Sharpe ratio, hit rate, information coefficient, t-statistic, turnover and maximum drawdown.

  These measures assess not only return but also consistency, trading intensity and downside risk of the Q-Score and the alternative Momentum composite.

• Quantitative, Factor, and Portfolio TheoryBeta/alpha analysis

  Beta-neutralised long/short Q-Score portfolios and regressions of long/short returns against the market.

  The report uses beta neutralisation to reduce broad market exposure and improve risk-adjusted long/short performance.

• Other

  100-tree Random Forest ML Q-Score using feature importance.

  The model identifies which factors are most important at a point in time for explaining future cross-sectional returns, then scores stocks using those dynamic weights.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Investor (INVEB SS)

  Added to Q-Score Bulls after a large Momentum-led rank improvement.

  Strengths

  Q-Score improved from 69 to 5; Momentum improved by 84 ranks and Quality rank was 10.

  Weaknesses

  Growth rank worsened from 21 to 47.

  Comparison

  Entered the top decile of the Q-Score.

  Risks

  Weaker historical cash-flow growth and EBIT-margin measures.

• ASML (ASML NA)

  Added to Q-Score Bulls and increased Technology conviction.

  Strengths

  Q-Score improved from 24 to 6; Momentum rank improved from 27 to 4, with stronger forward earnings momentum and EPS revisions.

  Weaknesses

  Expensive valuation.

  Comparison

  Firmly in the top decile.

  Risks

  Valuation is the report's stated key concern.

• Safran (SAF FP)

  Added to Q-Score Bulls.

  Strengths

  Q-Score improved from 25 to 4; Growth rank remained 7 and Momentum strengthened from 66 to 13.

  Comparison

  Firmly in the top decile.

• Millicom International Cellular (MIICF US)

  Q-Score Bull and illustrative chart example.

  Strengths

  Q-Score improved from 14 to 7 and Momentum rank reached 1; the report says relative price had not fully caught up.

  Weaknesses

  Value rank was 79 and Quality rank was 51.

  Comparison

  Presented as a Bull example.

• BKW AG (BKW SW)

  Added to Q-Score Bears.

  Weaknesses

  Q-Score rank deteriorated to 96, including a 68-rank decline in Growth.

  Comparison

  One of the largest monthly fallers.

  Risks

  Growth deterioration.

Key data

• July European equity return+1.8%European equities in July 2026.
• July Q-Score long/short return+2.0%Q-Score performance despite Momentum weakness.
• Momentum long/short return-7.3%July style drawdown.
• Value and Quality long/short returns+4.7%, +2.9%July contributors consistent with the reported Contraction backdrop.
• New versus standard Momentum maximum drawdown-19.3% vs -34.9%Long/short Q-Score backtest.
• New versus standard Momentum annual long/short return12.6% vs 11.5%Backtest comparison.
• Historical Q-Score annualised pre-cost long/short return13.9%Backtest result with 67.8% hit rate and 1.28 Sharpe ratio.

Impact & implications

The report presents the Q-Score as a diversified stock-selection framework whose Value and Quality exposures helped offset July's Momentum reversal. It regards the new Momentum composite as a potential future upgrade focused on reducing short-side drawdowns and turnover, but does not replace the established signal at this stage.

Risks

• Momentum can experience severe drawdowns, as shown by the July -7.3% long/short unwind.
• The alternative Momentum composite has a deeper long-only maximum drawdown, principally in the pre-2010 sample.
• The report notes that model inputs, factor leadership and stock rankings can change over time.

What to watch

• Whether the new Momentum composite sustains its backtested edge in drawdowns and turnover.
• The persistence of the Recovery-to-Contraction style rotation and associated factor dispersion.
• Technology conviction following ASML's Bull addition, and reduced Financials and Industrials tilts.
• Future Q-Score rank changes and earnings-revision momentum for the Bull and Bear screens.