I experienced a similar thing a couple of seasons ago when I had a decent team, with the odd class player (scout level) but mostly 3-4* (even the odd 2*). We punched well above our weight, won the league easily and got to SF in both CL and cup. I then took all the cash I'd earned from the previous season and bought loads of young 5* the season after. Despite having such a stellar squad, in fact the best I'd ever had by star rating, we scraped into 4th place in the league, got to SF of CL but went out in 1st or 2nd round of the cup.

Tougher competition does kick in the higher up you go, it's also that sometimes you do just sign some duds regardless of how many stars/SQs they have. It's just about getting the right blend and weeding out the players who aren't up to it. Sometimes they do come good though - the 5* MF I signed at the start if last season was absolutely shocking, 4/5/6 every game. I noticed he was scoring or getting assists but still getting crap ratings, so I kept playing him regardless of ratings and soon enough he turned into a beast, highest scoring MF and 7/8 every match.

My advice is suss out who are your most reliable players and stick with them, regardless of star ratings. Give the rest a chance to improve (season at most) and if they don't get rid.