In brief
- Factors were positive on average in the first quarter, extending a strong run despite surprises including war in the Middle East and market fluctuations around developments in artificial intelligence (AI).
- Equity factors rose in aggregate in the first quarter across nearly all regions, led by strong performance by U.S. equity factors and the momentum factor.
- Macro factors gained, supported most by FX carry and commodity momentum.
- We maintain our positive outlook for factors: The equity value factor remains attractive globally and we see an especially strong opportunity in the U.S.; the quality factor is also inexpensive in the U.S.
Overview
The onset of war in the Middle East, advances in AI capabilities, and markets’ reactions to both didn’t shake factors overall, which continued to power ahead for a positive first quarter, in aggregate (Exhibit 1).
Equity markets were down over the quarter following losses in March, but suffered less than was implied by volatility markets (e.g., the VIX). More of the story unfolded as stock-level dispersion neared record highs and significant moves occurred at the sector level.
Equity factors rose globally in Q1 in aggregate, for a third quarter. 4Q25’s trends generally continued, supporting the momentum factor: Investors favored value and capital-intensive company stocks (and in March, energy) and stayed wary of growth companies seen to be at risk of AI disruption.
Macro factors gained overall. Commodities broadly benefited from supply disruptions and inflation pressures, supporting the commodity momentum and FX carry factors. Other macro factors were challenged, including time-series momentum, as government bond markets oscillated and equities fell at the end of the quarter after a strong start to the year.
Our outlook remains positive overall. The equity value factor continues to appear highly attractive fundamentally, despite its recent strength. We are neutral on other equity factors. We are close to upgrading equity quality from neutral to positive. We emphasize that even a neutral view implies positive returns.
Factors in focus
Equity factors navigated market dispersion; momentum led
Markets reacted to AI and the Middle East conflict with extreme dispersion and some sharp moves. However, equity factors largely continued the trends in place last quarter. Momentum continued to lead, posting an exceptionally strong quarter. Value continued to grind higher and quality lagged, though less so than in mid-2025.
Equity momentum: Q1’s top performer on a sector-neutral basis, the factor gained in all regions, most strongly in the U.S.,1 for the factor’s best multi-year run since the dot-com bubble. The likely explanation: investors gravitated to winning companies and avoided worse performers2 amid the uncertainty surrounding AI’s economic impact and the Iran war.
However, the dispersion within the momentum factor (the difference in return between momentum winners and losers) is the widest since 1990.3 That raises the risk of a period of sharp period of factor underperformance. With no nascent signs yet of such an unwind (or factor “crash”), we remain neutral on the factor.
Equity value: In the factor’s third consecutive positive quarter globally, performance was strongest in emerging markets and the U.S. and weakest in the UK and Europe, reversing last year’s prevailing trend. Valuations and the outlook remain attractive despite recent strength—slightly rich in Europe and Japan but nearly as inexpensive as during the dot-com era in the U.S., Australia, Asia-Pacific (ex-Japan) and emerging markets.
We remain very optimistic about value’s prospects. Notably, how you assess the equity value factor matters to its relative attractiveness. When evaluated in the U.S. using style box measures,4 value is unremarkable: The Russell 1000 Value index is trading at its typical P/E discount to the Russell 1000 Growth index (Exhibit 2).
But value is much more attractive on a sector-neutral basis.5 By that measure, value remains more than one standard deviation inexpensive relative to history—an entirely different picture (Exhibit 3).
Style box equity value’s outperformance in Q1 was largely energy driven (helped by a 38% quarterly return for energy companies in the S&P 500) but forward-looking fundamental valuations favor a sector-neutral approach from here. Further bolstering our optimism about equity value in the U.S., a significant performance gap has persisted for several years between U.S. value and value in other markets (Exhibit 4).
That gap has continued even after U.S. value joined the global rally during the past two quarters. This reaffirms our positive outlook for U.S. equity value.
Equity quality posted another weak quarter—losses in Australia and Japan were partially offset by gains in emerging markets and Asia-Pacific (ex-Japan)—extending into its worst 12 months since COVID. Investors seemed to doubt the future of high quality businesses.
Historically, low quality stocks significantly outperform higher quality ones for short periods, followed by strong rebounds by quality. High quality stocks now trade at a discount to the broad market and relative to their long-term history—with no signs that fundamentals have deteriorated. The quality factor in U.S. markets is more attractive than at any time outside the dot-com bubble and the COVID-era dislocation (Exhibit 5).
Quality valuations are compelling across most regions except Japan and generally more attractive across smaller cap stocks than large.
Overall, we remain optimistic about the quality factor’s prospects globally, when considering the quality of a company in a broad sense, including balance sheet and income and cash flow statements—metrics we think will matter going forward.
Macro factors: Carry held in well, offsetting losses from momentum in March
Macro factors posted positive returns over the quarter despite March’s war-driven tumult. Gains by carry factors offset momentum’s losses.
FX carry led carry and macro factors, even as volatility spiked in March and markets took a risk-off tone. Long positioning in the U.S. dollar, which rose nearly 2%, benefited from safe-haven flows and investors’ repricing of interest rate cuts in response to the Iran conflict.
Long positioning in certain commodity currencies (AUD, NOK) benefited from the commodity rally and from hawkishness from the Reserve Bank of Australia. Short positioning in JPY gained as the yen weakened on Prime Minister Sanae Takaichi’s fiscal stimulus push.
Commodity carry’s positive Q1 was supported by long positioning in crude oil, as the futures curve backwardated sharply on Middle East tensions and market participants’ expectations that tensions would eventually de-escalate.
Our outlooks for FX, fixed income and commodity spreads remain neutral. FX carry spreads edged up from 2.9% to 3.0%, wide relative to the post-GFC average of 2.5%,6 but only in the 36th percentile since the early 1990s.7
Fixed income carry spreads tightened, ending the quarter one standard deviation below their long-term average. Yield curve steepness differentials (between the steepest and flattest government bond markets) narrowed in Q1 to 0.4% from 0.5%, and the real yield differential between high yielding and low yielding economies narrowed to 0.7% from 1.0%. We keep our outlook negative.
Commodity spreads remain attractive, as steep oil backwardation helped offset reduced carry available in other commodity futures markets.
Momentum factors started strong as 2025’s equity and commodity trends (e.g., gold and silver) carried over but reversed sharply with the onset of the Iran war. Non-U.S. equities, which led in January and February, underperformed in March.
Across government bond markets, trend positioning moved from short duration to begin the year to long duration in mid- to late February, just ahead of March’s global rise in bond yields. In commodities, long oil positioning captured the conflict-driven rally, but declines in gold and silver in March offset a portion of the gains from commodity time-series momentum.
The number of significant trending markets has declined, lessening opportunities in time-series momentum and moving positioning closer to neutral in equities (slightly long) and fixed income markets (slightly short), though still long across many commodities. This narrows the profit (or loss) potential, until new trends emerge.
However, commodity market dispersion has increased sharply between top performers (oil, livestock, certain metals) and laggards (certain agricultural commodities, natural gas), creating opportunities for the relative value commodity momentum factor, where our outlook improves from neutral to positive.
Concluding remarks
We continue to see generally attractive prospects for equity factors, led by attractive valuations for the value factor. We rate most macro factors neutral. We are close to upgrading our outlook for the quality factor based on more attractive valuations. With elevated geopolitical uncertainty clouding the picture for traditional asset classes, we continue to see factors as an attractive opportunity for diversifying sources of return.
Factor opportunity set
The table below summarizes our outlook for each of the factors accessed across J.P. Morgan Asset Management. It does not constitute a recommendation, but rather indicates our estimate of the attractiveness of factors in the current market environment.
Our framework for evaluating factor outlooks is centered on the concepts of dispersion, valuation and the opportunity for diversification. For equity factors, we measure dispersion and valuation spreads between top quartile and bottom quartile stocks on a market, region and sector-neutral basis. For event-driven factors, we measure implied carry and the level of corporate activity as indicative of the ability to minimize idiosyncratic stock risk. For macro factors, we measure the dispersion or spread between top ranked and bottom ranked markets, as well as the number of significantly trending markets.
1 In the U.S., equity momentum posted the second strongest quarter since the turn of the century (surpassed only by Q1 2024; at that time the strong performance came from a continuation of the AI boom, robust corporate earnings and strong investor sentiment that carried over from late 2023.
2 Whether in price terms, or in positive earnings revisions.
3 The earliest data in our records.
4 A style box is a visual 3×3 grid that classifies equity investments by size (large, mid, small cap) on one axis and value/growth style (determined by metrics like price-to-book, P/E and earnings growth) on the other.
5 By sector-neutral, we mean comparing technology stocks to technology stocks, energy stocks to energy stocks, etc. and not favoring one sector over the other in defining the factor.
6 And much wider than the COVID-era lows of 0.8%.
7 The overall average since the inception of our data in the early 1990s is 3.7%. The average for the period before the global financial crisis is 4.8%.
Glossary
- Equity value: Long/short global developed stocks based on book-to-price, earnings yield, dividend yield, cash flow yield; sector and region neutral
- Equity quality: Long/short global developed stocks based on financial risk, profitability and earnings quality; sector and region neutral
- Equity momentum: Long/short global developed stocks, based on price change and earnings revisions; sector and region neutral
- Equity size: Long/short global developed stocks based on market capitalization; sector and region neutral
- Macro carry: FX G-10 carry, FX emerging market carry, fixed income term premium, fixed income real yield, commodity carry
- Macro momentum: FX cross-sectional momentum, commodity cross-sectional momentum and time series momentum across equity, fixed income and commodity markets
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