S&P 500 Factor Analysis

This post was originally written in Turkish and translated into English with AI.

A factor is a return stream that many stocks carry in common. Since Fama and French placed value and size alongside market beta in 1992, the number of these streams has grown; the six that pass as common currency in the institutional world today are market, value, momentum, quality, low volatility and size. Each carries a premium that can be justified economically and has been observed consistently across decades of data. An industry, a sector or a fund is in effect a basket tied to these six streams with specific coefficients, and those coefficients explain a large part of its return. Factor analysis turns the question “what do I own” into “which risks and which regime am I betting on”; whatever is left over from stock selection only earns the name alpha after that decomposition. That is exactly what we will do in this piece: measure the exposure of US index industries to the six factors from daily returns, track how those exposures have drifted over time, and read what each one corresponds to at the macro level.

Before getting into the analysis, let us go through the factors and what they mean.

Market

The market factor is sensitivity to the broad equity market itself: our series takes the daily log return of MSCI USA as the market return, and the beta is an industry’s regression coefficient to that stream. A beta of 1.0 moves one for one with the index; 1.5 multiplies every market return by 1.5; 0.5 is affected by half of each unit of market movement. Because it is the cycle itself, it generates returns in expansions and liquidity rallies and costs the most in drawdowns; its macro translation is long growth and risk appetite, short volatility and credit spreads. A real yield shock, a credit event or a VIX spike hits this beta first. Across industries the dispersion runs from about 0.5 (utilities, staples, parts of health care) to 1.5 (semiconductors, software, consumer finance). A portfolio’s market exposure is the sum of weight times beta; a fully invested portfolio with an average beta of 1.3 behaves like 130% of the index, and the hedge is sized against that number. It is also the only beta that can be measured reliably on a short window: the factor’s standard error averages ±0.1.

Value

Value is the tendency of cheap stocks to outperform expensive ones. Our series is the return of the MSCI USA Enhanced Value index minus MSCI USA. Forward P/E, enterprise value to operating cash flow and price to book are scored as sector-relative z-scores, the weight is score times market cap, and sector weights are kept close to the parent index. Value therefore means “cheap within its sector” rather than “cheap sector”; a bank gets the value factor because it is cheap for a bank. Companies need to be cheap to carry the value factor, but that effect can also come from being more leveraged, more cyclical, or from the company’s governance risks.

The US value factor lost roughly 60% against the market between 2015 and 2025, yet recovered close to 40 points in 2026. The macro reason lies in value’s structure: long real yields and curve steepening, short duration. Put simply, the rising cost of money created an opportunity for companies that are cheap, cash-rich and able to put that cash to work.

Momentum

Momentum is the tendency of stocks that have beaten the market over the past six to twelve months to keep doing so for a few more months. The MSCI USA Momentum index divides each stock’s six- and twelve-month return, excluding the most recent month, by its three-year volatility to produce a risk-adjusted score; our series is that index’s return minus MSCI USA. It is rebalanced twice a year, with additional rebalances on volatility spikes. It is the sector where behavioural factors and market excitement show up most. It works in trending markets with a persistent leadership theme (2017, 2020 and the last four years) and collapses at turning points when the losers rally violently (March-April 2009, November 2020; in Europe the momentum factor’s relative return went from +40% to -40% between 2022 and 2026). Today’s momentum index may be miners and banks; for the last two years, for instance, that leader was semiconductors. The beta is measured with a tight error (0.05-0.08) and gives a clear answer to “what do I lose if the trend breaks”. A large positive momentum exposure is indirectly a short volatility position, since you have bet that the trend will continue.

Quality

Quality is the tendency of companies with high profitability, low leverage and stable earnings to outperform on a risk-adjusted basis. The MSCI USA Sector Neutral Quality index scores return on equity, debt to equity and the standard deviation of five-year EPS growth as sector-relative z-scores; our series is that index’s return minus MSCI USA. It is the steadiest of the style factors; in the sample it is the only US style that stayed positive across the decade. It works in slowdowns, credit scares and late cycle; in early recoveries, when risky companies rally hardest, it lags because it is already a crowded factor. In macro terms it is short credit spreads, mildly long duration and long flight to safety; because it moves together with Min Vol in stress, the two are hard to separate statistically on short windows and resemble each other.

Low Volatility (Min Vol)

Low volatility is the anomaly that low-risk stocks produce returns comparable to high-risk ones, and therefore beat them per unit of risk. Unlike the others it is not a scored factor but an optimised portfolio. MSCI builds the minimum-variance combination of MSCI USA constituents with the Barra risk model, under constraints: a single-stock cap, sector weights within 5 points of the parent, limited exposure to the other style factors and limited turnover. The index is computed as that index’s return minus MSCI USA, and the portfolio generally concentrates in utilities, staples, insurance, health care and telecoms. The premium’s rationale is leverage and benchmark constraints: investors who cannot or will not use leverage overpay for high-beta stocks to reach their return targets, and low-beta stocks stay cheap. It works well in drawdowns, deflation scares and falling-rate regimes; in bull markets it is the factor that lags the most.

Size

Size is the tendency of small companies to outperform large ones. Here it is defined as the MSCI USA Small Cap return minus MSCI USA (large and mid cap). In theory the risk premium comes from illiquidity and lack of information. Small stocks trade on thin volume and are less transparent to the public, which weighs on their price. That pressure turns into outperformance when financial conditions ease, credit is cheap and the cycle broadens beyond the largest companies. It is the factor with the weakest academic evidence among the classics; most of the historical premium came from the smallest, least investable names and from the January effect.

Having defined the factors briefly, let us look together at the factor betas of US sub-sectors. (GICS L3 industries, market weight above 0.1%.)

What has caught my attention most recently comes from the Energy index. While the sector leaves an incredible year behind, it is creating a sizeable anomaly: leading on both the Momentum and the Min Vol factors at once, a combination not normally seen. Below you can see the effects of these factors in a more detailed table. Full Sample covers data since 2015.

Below you can see how the different factors have performed relative to the S&P index.

The steady outperformance on the Quality side stands out, but so does the rise in value stocks, especially since 2025. As exciting as this is for value investors, I have to share an uncomfortable truth here.

Among the companies that make up today’s value factor there are many technology companies, and they are among the biggest players in the factor. The fast-growing, low-multiple companies of the IT sector also fall into this factor category, for the reasons I set out at the start.

Disclaimer

This post has been prepared for informational purposes only and does not constitute investment advice, a recommendation to buy or sell, or an offer relating to any security. The views and analyses expressed here reflect the author’s personal assessments and do not represent the official view of any institution he is affiliated with. The author may hold positions in the securities mentioned in this post. Past performance is no guarantee of future results. Every investment carries risk; investors should do their own research and consult a licensed investment advisor where necessary.