A quantitative review of factor returns across global equity markets in Q1 2026 — value, momentum, quality, and low volatility — with forward expectations based on macro regime analysis.
Factor investing had a turbulent quarter. Value rebounded sharply in January before giving back gains through February as the macro narrative shifted. Quality, our preferred systematic lens for late-cycle conditions, held its ground — posting +3.2% against a benchmark that returned +1.1%.
The Dispersion Problem
The most significant analytical challenge of Q1 2026 was not the direction of markets — it was the widening of factor dispersion. Cross-sectional volatility in factor returns hit its highest level since Q3 2022, meaning that the same systematic framework produced vastly different outcomes depending on implementation choices.
Specifically: short-leg contamination. Models with loose short criteria saw their factor portfolios dragged by a cluster of value traps concentrated in energy transition and commercial real estate. Clean implementation — requiring not just low valuation but positive operating cash flow and manageable covenant exposure — sidestepped the bulk of this drawdown.
Momentum: A Case Study in Regime Sensitivity
Momentum factor performance is the most instructive case study of the quarter. Through January 18th, the 12-1 momentum factor was showing +5.7% annualised — consistent with the regime we identified in Q4 as a low-volatility, trend-following environment. The abrupt reversal on January 19th (driven by shifting Fed expectations) saw momentum give back 4.2% in three sessions.
"Momentum works until it doesn't. The question is never whether a factor strategy has edge — it's whether the current regime supports that edge. This quarter answered clearly: read the macro before reading the signal."
Forward Expectations
Our Q2 2026 factor outlook: overweight quality (remains well-priced given deteriorating earnings quality in cyclicals), neutral momentum (regime signal is ambiguous), underweight low-vol (valuations extended, crowding metrics elevated), and cautiously positive on value-growth rotation in global ex-US.
The key risk to this view: a faster-than-expected Fed pivot compresses the quality premium rapidly. We model this scenario as having a 28% probability over the next 90 days.
