Overview

Risk assets approached or surpassed all-time highs in the fourth quarter as equities rallied across the globe—outside the U.S., in particular—and credit spreads generally reached all-time tights, or nearly did. Safe-haven assets, such as government bonds and precious metals, also posted strong quarters. Precious metals soared: Gold and silver outperformed any period since the late 1970s. While factors are not typically correlated to traditional stock, bond or commodities markets, factors, too, posted a positive quarter on average (Exhibit 1), continuing the strong run of recent years.

Geopolitics remained a concern for investors in Q4 but market participants generally shrugged off the potential for disruption. Markets were boosted by solid economic fundamentals, strong economic expansion, easing inflation pressures and solid earnings growth.

Equity factors contended with signs of a new stock regime in the U.S. as capital rotated toward value and smaller cap stocks and away from momentum. Despite this shift, and headwinds for the quality factor, equity factors rose significantly in Q4 on a global basis for the second consecutive quarter. As 2025 ended, the equity factor continued a five-year streak of gains. Macro factors posted a mixed fourth quarter, as losses from carry slightly offset gains from momentum, but macro ended 2025 higher in aggregate for the fourth consecutive year.

Our broad factor outlook is positive overall. The equity value factor remains highly attractive from a fundamental perspective, despite its recent strength. We are neutral on other equity factors, although we are close to upgrading the quality factor to positive and we emphasize that even a neutral view implies positive returns. We are also neutral overall on macro factors; however, we are close to upgrading our outlook on macro momentum.

Factors in focus

Equity factors saw a shift in leadership the fourth quarter—in the U.S., in particular

The equity factor regime showed signs of changing over the fourth quarter as factor trends in place for the past year broke down amid a mid-November shift in equity market leadership. In a broadly strong quarter, equity markets wobbled, especially in the U.S., as investors began to question the infrastructure costs and risk of circular financing associated with artificial intelligence (AI) companies, and some investors began moving away from mega-cap tech stocks toward smaller and value-oriented stocks.

The equity value factor was the best performing factor in Q4 in all regions. The U.S. value factor recorded the second-best quarter since mid-2024. Until 4Q 2025, U.S. value had stood out for lagging value’s strong performance elsewhere. Even as it began recover, other international developed market value factors recorded stronger gains in Q4. Japan and Europe led. A significant gap remains between U.S. value’s recent performance and other regions’ (Exhibit 2).

The value factor’s price level and forward prospects remain almost as attractive as last quarter on a global basis, despite strong Q4 performance. It is nearly as attractive in the U.S., Australia, Asia Pacific (ex Japan) and emerging markets as during the height of the dot-com bubble. The value factor is also cheaper than average in Europe and the UK; only in Japan is it slightly rich. Overall, we remain very optimistic on value’s prospects.

The momentum factor logged its only negative quarter of 2025, almost all due to U.S. markets. Momentum fared worst among U.S. large and mid cap stocks and declined among U.S. small caps, as well. Momentum performed very well in the UK, Asia and Europe, gaining in all the international markets we track except Australia. Looking ahead, the factor remains slightly expensive on a global basis, which may make it more susceptible to a sharp reversal or a pullback, but our outlook varies by region. Despite recent strong performance in most international markets, momentum is cheaper than its long-term average in Europe and the UK but is expensive in the U.S.—small cap in particular—and in Australia and emerging markets. We leave our outlook neutral globally.

The quality factor’s Q4 losses closed one of the factor’s most challenging years globally as quality underperformed its 30-year average nearly everywhere (Exhibit 3A). This broad-based underperformance echoes prior periods of speculative fervor when investors prioritized growth expectations over profitability and financial risk measures.

Quality had an unusually poor year, although historically the factor has bounced back from such periods quickly

Quality had its fourth most challenging year globally since our data’s inception in 1990. (Only rebounds from crisis periods—2003, 2009 and 2020—were worse.) One lesson we take from previously challenging times for the quality factor is that historically, the periods when low quality stocks significantly outperform higher quality tend to be short-lived—and are often followed by periods of strong outperformance, as fundamentals reemerge as a key driver within equity markets (Exhibit 3B).

We note another potential tailwind for the quality factor from here: High quality stocks are now priced at a discount, both to the broad market and relative to their long-term history. Within U.S. markets, the quality factor is more attractive than ever, except for during the dot-com bubble and the COVID-era dislocation (Exhibit 4). The factor is even more attractive within the U.S. smaller cap universe, at the 88th percentile relative to its long-term history. Quality is also attractive in Australia, Asia (ex Japan) and emerging markets, but we rate it neutral in Europe, and somewhat expensive in Japan and the UK.

Overall, we remain optimistic about the quality factor’s prospects globally.

Macro factors: Momentum led, carry lagged

Macro factors had a mixed quarter. Gains from momentum factors offset losses from carry factors. The most significant moves occurred across commodity markets, where increased dispersion in different commodities’ price behavior prompted some of the strongest and weakest factor performance.

In aggregate, commodities rose 5.85% in Q4, and 15.77% in 2025, the best year for the Bloomberg Commodity Index since 2022. The gains were not uniform, however. Precious metals and industrial metals rallied to reach or extend all-time highs, fueled by geopolitical developments, the energy transition and increased demand. But energy and agricultural commodities generally declined in Q4. The lack of a broader-based rally in commodities, coupled with a stable U.S. dollar over the quarter, undermined the narrative that investors were participating in the so-called currency debasement trade—buying real assets and selling the dollar on concern the currency could lose purchasing power due to inflation, monetary expansion and/or fiscal instability.

The commodity momentum factor—whether defined in relative value or trend-following terms—was well positioned to capture the rally in gold, silver and copper. Commodity momentum also profited from a continued fall in sugar prices after record harvests in 2025. But some of the gains in the commodity momentum factor were offset by losses from reversals in nickel (due to Indonesian supply cuts) and declines in agricultural commodities, such as live and feeder cattle futures

Commodity carry struggled over the quarter. The lack of carry implied by futures curves led to flat positioning across most precious and industrial metals, and left many investors positioned on the wrong side in the crude oil, natural gas, sugar and cattle markets.

FX factors had a quiet Q4. The U.S. dollar stabilized in the second half, from the largest depreciation in more than 50 years during the first half of the year, but remained generally range-bound. Little transpired in the FX carry and FX momentum factor markets.

Fixed income factors experienced some weakness. The yield curve carry factor was challenged by its long positioning in Japanese government bonds, which fell on concern about the country’s expansionary fiscal policy. Other challenges: its short positioning in UK Gilts and U.S. Treasuries, at a time when both markets were supported by cooling inflation.

Equity trend enjoyed a strong quarter on continued gains across global equity markets.

Our outlook on macro factors is neutral, little changed from last quarter. FX carry spreads of 2.9% are wide relative to the post-global financial crisis average of 2.5% (and much wider than the COVID-era lows of 0.8%). Still, FX carry spreads are only in the 33rd percentile, compared to our data’s history dating to the early 1990s,¹ and have started to tighten compared to the past couple of years.

Central banks across the globe are on different policy rate trajectories (e.g., the Federal Reserve has been cutting interest rates and the Bank of Japan has been hiking rates), which might suggest a large difference in carry spreads between countries. That was not the case in Q4. Fixed income carry spreads are similar across countries, at roughly one standard deviation below their long-term average. That is the case whether we measure carry in terms of yield curve steepness (there was about a 0.5% differential between the steepest and flattest curves at the end of Q4) or real yield terms, where there was about a 1% differential between high yielding and low yielding countries.

Commodity spreads, on the other hand, again widened in the fourth quarter—we had upgraded our estimate of the factor’s attractiveness last quarter. A large part of the difference was related to above-average levels of backwardation and contango among commodities marked by seasonality, such as natural gas and lean hogs.

In addition, and as noted above, dispersion in performance across commodity markets rose, and is now at the 74th percentile relative to the past 30 years, supporting our outlook for commodity relative value momentum. We also continue to observe a significant number of trending markets, both positively (e.g., equities and precious and industrial metals) and negatively (e.g., agricultural and energy commodities), supporting trend or time-series momentum factors.

Concluding remarks

We continue to see generally attractive prospects for equity factors, led by attractive valuations for the value factor, and we largely rate macro factors neutral. We are close to upgrading our outlook for the quality factor based on more attractive valuations, and for macro markets as the trend of increasing dispersion appears to be strengthening.

While the market backdrop is still unusual—and that may challenge traditional asset classes—we continue to see factors as an attractive opportunity for diversifying sources of return.

¹ 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 regional 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-section momentum and time series momentum across equity, fixed income and commodity markets

c22ee6c0-b50f-11e7-99dc-005056960c63