| | Higher-for-longer interest rates and uneven global growth have pushed equity markets into a more fractured environment. | Recent quarters show wider performance gaps between sectors, styles, and individual companies as earnings surprises become more pronounced. Volatility has remained contained, yet dispersion — the spread between winners and losers — has climbed back toward pre-2020 levels. Amid this shift, we examined whether traditional factor rotations are re-emerging after years of dominance by broad market beta. | In this article, we explore how momentum, value, quality, and low-volatility factors have behaved through this macro transition and whether rising dispersion is reviving the cyclical leadership patterns that once defined factor investing. |
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| | | Momentum's Fade and Repricing Cycles | Momentum — which tracks stocks with strong recent performance — has historically been sensitive to macro inflection points. The past year illustrated that pattern. As rate volatility increased and earnings revisions broadened, momentum screens experienced sharp internal reshuffling. Leaders in AI-adjacent tech continued to outperform, but extended valuations created fragility, allowing cyclical and defensive names to intermittently gain traction. | Data from major momentum ETFs shows turnover rising through 2024–2025, signaling that leadership is less stable than in the post-pandemic period. Our review suggests the factor remains functional but more vulnerable to abrupt reversals when macro signals conflict. |
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| | | Mean Reversion Reappears in Value and Cyclicals | Value factors, which had struggled through much of the past decade, saw pockets of recovery. The shift reflected not only lower growth expectations but also a reversion in price-to-earnings spreads between expensive and inexpensive stocks. Industrials, financials, and commodity-linked areas benefited as investors reassessed long-term earnings durability. | Cross-sectional studies highlight a strengthening mean-reversion effect — stocks underperforming for several quarters rebounded as fundamentals stabilized — particularly in regions where valuation dispersion had reached extremes. | Quality's Steady Climb in a Higher-Rate World | Quality factors — companies with strong balance sheets, stable cash flows, and consistent earnings — gained prominence as financing costs increased. Our analysis found that quality screens outperformed in markets where credit conditions tightened, echoing prior rate-hike cycles. | This factor also benefited from greater earnings reliability at a time of divergent analyst revisions. Defensive growth companies in healthcare and software frequently appeared in both quality and low-volatility baskets, reinforcing the factor's resilience. |
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| | | Low Volatility's Second Act | Low-volatility strategies tend to shine when markets enter late-cycle dynamics, and recent performance trends reflect that pattern. While not dramatically outperforming, these portfolios delivered steadier returns relative to broad indices during macro-driven drawdowns. | The appeal of the factor appears tied to the search for stability as central bank guidance oscillates and geopolitical risks intensify. Several global low-volatility ETFs recorded renewed inflows after years of muted interest. | Risks, Noise, and the Limits of Factor Timing | The renewed attention on factor rotations arrives with limits. Historical relationships between macro variables and factor outcomes remain inconsistent, particularly around regime shifts. The expansion of multi-factor products can dilute exposures and complicate interpretations of leadership cycles. | Dispersion may be rising, but correlations remain elevated relative to earlier decades, tempering the degree to which factors can fully decouple. Our review shows that leadership cycles often shorten when policy uncertainty is high, making sustained rotations difficult to confirm. |
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| | | Conclusion | Recent trends suggest a revival in factor rotations, though in forms that differ from the sweeping, multi-year regimes seen in past cycles. Momentum, value, quality, and low volatility have each found windows of relative strength as markets adjust to persistent inflation and shifting policy signals. The result is a landscape where factor behaviors matter again, but in shorter, more tactical bursts. In this environment, the return of factor rotation feels less like a structural shift and more like a cyclical reminder that market leadership rarely stays still. |
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