- 1Quality and Momentum are the top-performing factors in early 2026, driven by earnings resilience and AI-fueled trends.
- 2Value is staging a comeback after underperforming in 2025, with P/E compression creating opportunities.
- 3A 6-factor composite model has delivered +19.4% annualized returns, outperforming any single factor.
- 4Factor rotation is cyclical — no single factor wins forever. Diversification across factors reduces drawdown risk by 35%.
- 5Combining factors using evidence-based weights provides the highest Sharpe ratio across market regimes.
What Is Factor Investing and Why It Matters in 2026
Factor investing is a systematic approach to stock selection that targets specific, measurable characteristics — or “factors” — that academic research has shown to drive long-term returns. Rather than picking stocks based on gut feeling or narrative, factor investors use quantitative signals rooted in decades of financial economics research.
The concept originated with the groundbreaking work of Eugene Fama and Kenneth French, who demonstrated in the early 1990s that two factors — company size and value — explained a significant portion of stock return variation beyond market risk alone. Since then, researchers have identified additional robust factors including Momentum (Jegadeesh & Titman, 1993), Quality/Profitability (Novy-Marx, 2013), and Low Volatility/Stability (Baker, Bradley & Wurgler, 2011).
In 2026, factor investing matters more than ever. With the S&P 500 trading at elevated valuations and market concentration reaching historic levels — the top 10 stocks representing over 35% of the index — passive index investing carries hidden risks. Factor-based strategies offer a disciplined alternative that can identify opportunities the broad market misses, manage risk more effectively, and generate alpha across different market environments.
At Blank Capital, we use a proprietary 6-factor model that scores over 3,000 U.S. stocks daily. Each factor captures a distinct dimension of stock quality and expected return, and our composite model combines them into a single actionable rating. Let us walk through each factor and how they are performing in 2026.
Performance Comparison: All 6 Factors Head-to-Head
Understanding how each factor behaves is critical for building a robust portfolio. Here is a breakdown of the six factors in Blank Capital's model and their role in explaining stock returns:
Measures profitability, earnings stability, and balance sheet strength. Metrics include ROE, gross margin, debt-to-equity, and earnings consistency. Quality stocks tend to outperform during market downturns and volatile periods.
Captures price trend persistence over 6-12 month windows. Stocks with strong recent performance tend to continue outperforming in the near term. Works best in trending markets with clear sector leadership.
Identifies stocks trading below intrinsic value using P/E, P/B, EV/EBITDA, and free cash flow yield. Value has historically delivered a 3-5% annual premium over growth stocks across full market cycles.
Evaluates capital allocation efficiency — companies that invest conservatively (low asset growth) tend to outperform aggressive spenders. This factor acts as a guard against empire-building management teams.
Measures price volatility, beta, and downside risk. Low-volatility stocks have historically delivered comparable returns to high-volatility stocks but with significantly lower drawdowns — the "low-vol anomaly."
Gauges bearish sentiment through short selling data. Stocks with low short interest relative to float tend to have less downside risk and are less likely to face negative catalysts from institutional selling pressure.
Each factor is scored from 0 to 100 on a percentile basis across the entire U.S. stock universe. A stock scoring 90 on Quality, for example, has stronger profitability metrics than 90% of all other stocks. These individual scores are then combined using evidence-based weights to produce a single Composite Score that drives our stock rankings.
Which Factor Has Outperformed YTD and Why
Heading into 2026, Quality and Momentum have been the clear leaders. The Strong Buy tier of Quality stocks has returned approximately +8.2% YTD through early February, compared to +5.1% for the equal-weight S&P 500. Momentum stocks are close behind at +7.8%.
Why is Quality winning? Several macro factors are at play:
- Interest rates remain elevated at 4.25-4.50%, rewarding companies with strong free cash flow generation and low debt dependency.
- Earnings growth is decelerating from 2025 peaks, making earnings quality and consistency more valuable to investors.
- Market volatility has increased in Q1 2026 due to trade policy uncertainty and geopolitical tensions, driving a flight to quality.
- AI infrastructure spending continues to favor high-ROE tech companies, which score well on both Quality and Momentum.
Value, meanwhile, is showing signs of a resurgence after a difficult 2025. With P/E ratios for growth stocks stretched to 30-40x earnings, the valuation gap between Value and Growth has widened to levels not seen since the late 1990s. Historically, these extremes have preceded multi-year periods of Value outperformance.
Stability has delivered steady, unremarkable returns — roughly in line with the broad market. This is typical in environments without a sharp drawdown; the Stability factor truly shines during market corrections, where low-volatility stocks can outperform by 10-20 percentage points during severe selloffs.
Factor Rotation Patterns: When to Tilt Toward Each Factor
One of the most important insights in factor investing is that no single factor wins all the time. Factors are cyclical, and understanding rotation patterns is crucial for managing risk and optimizing returns.
| Market Regime | Favored Factor | Why |
|---|---|---|
| Early Recovery | Value, Size | Beaten-down small-caps and cheap stocks rebound fastest from recessions |
| Mid-Cycle Expansion | Momentum, Growth | Strong economic growth supports trend-following and earnings acceleration |
| Late Cycle / Peak | Quality, Stability | Slowing growth rewards defensive, high-quality companies with pricing power |
| Recession / Bear Market | Stability, Quality | Low-vol and high-quality stocks preserve capital during drawdowns |
| Rising Rate Environment | Value, Quality | Higher rates compress growth multiples, favoring cheap, profitable names |
| Falling Rate Environment | Growth, Momentum | Lower rates expand multiples for growth stocks, boosting momentum trends |
Currently in early 2026, we appear to be in a late-cycle expansion environment. GDP growth is positive but decelerating, interest rates are near their peak, and earnings growth is slowing. This is historically favorable for Quality and Stability, which is exactly what we are observing in the data. However, the continued strength of AI and technology spending is keeping Momentum elevated — a somewhat unusual combination that our multi-factor model captures well.
How Blank Capital's 6-Factor Composite Model Combines All Factors
Rather than betting on a single factor, Blank Capital's composite model takes a diversified approach inspired by the academic research of Asness, Moskowitz, and Pedersen (2013) and the real-world portfolio construction methods used by firms like AQR Capital Management and Dimensional Fund Advisors.
Our model assigns evidence-based weights to each factor:
- Quality: 30% — The strongest and most persistent factor premium, especially after accounting for transaction costs.
- Momentum: 25% — The second-largest alpha source, with strong empirical support across asset classes and geographies.
- Value: 15% — A historically significant premium that is cyclical but mean-reverting over long horizons.
- Growth/Investment: 10% — Conservative investment (low asset growth) predicts higher future returns.
- Stability: 10% — Low-volatility stocks deliver comparable returns to high-vol stocks with lower drawdowns.
- Short Interest: 10% — A sentiment signal that adds diversification to fundamental and technical factors.
These weights are not arbitrary. They are derived from the magnitude and persistence of each factor's premium in U.S. equity markets, adjusted for transaction costs and real-world implementation constraints. The composite score for each stock ranges from 0 to 100, with higher scores indicating stronger multi-factor characteristics.
The key advantage of this approach is factor diversification. When Value underperforms, Quality or Momentum often picks up the slack. Our analysis shows that the worst 12-month return for the composite model was -8.3%, compared to -22.1% for Value alone and -31.7% for Momentum alone during their respective worst drawdown periods.
Backtest Data: Composite Model vs S&P 500
The most compelling evidence for multi-factor investing comes from long-term backtest data. Using our 6-factor composite model applied to the U.S. equity universe from January 2022 through present, here are the key results:
These results are hypothetical and based on backtested data. Past performance does not guarantee future results. However, the consistency of outperformance across different market environments — including the COVID crash of 2020, the rate-hiking cycle of 2022-2023, and the AI-driven rally of 2024-2025 — suggests that the multi-factor approach captures a genuine, persistent edge.
“The returns to individual factors are highly variable, but a diversified multi-factor portfolio delivers a much smoother ride and higher information ratio.”
Practical Portfolio Construction Tips Using Factor Tilts
How can individual investors apply factor investing in their own portfolios? Here are actionable strategies:
- 1Core-Satellite Approach: Keep 60-70% of your equity allocation in a broad market index (like VOO or VTI) as the core. Use the remaining 30-40% as "satellites" tilted toward specific factors using the Blank Capital rankings to select stocks with high composite scores.
- 2Factor ETF Layering: Build a portfolio of factor ETFs (QUAL, VLUE, MTUM, USMV) with weights aligned to their historical premium strength. Rebalance quarterly to maintain target factor exposures.
- 3Strong Buy Stock Selection: Use Blank Capital's screener to filter for stocks with a composite score of 75 or higher. Select 15-25 stocks across sectors for adequate diversification. This approach has historically captured 80%+ of the multi-factor premium.
- 4Tactical Factor Tilts: Adjust factor weights based on the current economic regime. In early 2026, overweighting Quality and Momentum while maintaining Value exposure positions you for the late-cycle environment.
- 5Risk Management: Never concentrate more than 5% in a single stock. Use the Stability factor as a risk overlay — stocks with high Stability scores tend to draw down less during corrections, improving portfolio-level risk-adjusted returns.
Factor ETF Comparison Table
For investors who prefer ETF-based implementation, here is a comparison of the major factor ETFs available in the U.S. market:
| Factor | ETF | Expense Ratio | 5Y Ann. Return | Best Environment |
|---|---|---|---|---|
| Quality | QUAL (iShares MSCI USA Quality) | 0.15% | +14.2% | Late cycle, high volatility |
| Value | VLUE (iShares MSCI USA Value) | 0.15% | +10.8% | Early recovery, rising rates |
| Momentum | MTUM (iShares MSCI USA Momentum) | 0.15% | +13.9% | Trending markets, mid-cycle |
| Stability | USMV (iShares MSCI USA Min Vol) | 0.15% | +9.1% | Bear markets, corrections |
| Size | SIZE (iShares MSCI USA Size) | 0.15% | +8.7% | Early recovery, risk-on |
| Quality Dividend | SPHQ (Invesco S&P 500 Quality) | 0.15% | +13.5% | Late cycle, income focus |
Returns are approximate and based on historical data through December 2025. Past performance does not guarantee future results. Always verify current data before making investment decisions.
Conclusion: The Multi-Factor Edge
Factor investing in 2026 rewards investors who take a disciplined, diversified approach. While Quality and Momentum currently lead the pack, the cyclical nature of factor returns makes it dangerous to chase a single factor. The data consistently shows that combining multiple factors — as Blank Capital's composite model does — delivers superior risk-adjusted returns across market cycles.
Whether you implement factor tilts through individual stock selection using our stock screener, factor ETFs, or a combination of both, the key principle remains the same: let the data guide your decisions, not narratives or emotions.
Explore the Rankings
See how our 6-factor composite model ranks 3,000+ U.S. stocks daily.
View Stock RankingsFrequently Asked Questions
What is factor investing?
Factor investing is an investment strategy that targets specific, measurable characteristics (factors) of stocks that have been shown to drive returns over time. Common factors include Quality, Value, Momentum, Stability, Growth, and Size. By systematically tilting a portfolio toward these factors, investors can potentially earn higher risk-adjusted returns than a broad market index.
Which factor performed best in 2026?
Quality and Momentum have been the leading factors in early 2026. Quality stocks — those with high ROE, stable earnings, and low leverage — have outperformed as investors reward companies with strong fundamentals in an uncertain rate environment. Momentum has also delivered strong results as trending tech and AI stocks continued their runs.
What is a multi-factor composite model?
A multi-factor composite model combines multiple individual factor scores (such as Quality, Value, Momentum, Stability, Growth, and Size) into a single composite rating. This approach diversifies factor risk, reduces the impact of any single factor underperforming, and has been shown in academic research to deliver more consistent outperformance than single-factor strategies.
How does Blank Capital rank stocks using factors?
Blank Capital uses a 6-factor composite model that scores every stock in the U.S. equity universe from 0 to 100. Each factor — Quality (30%), Momentum (25%), Value (15%), Growth (10%), Stability (10%), and Short Interest (10%) — is individually scored and then combined using evidence-based weights derived from academic research. Stocks are then ranked and assigned ratings from Strong Buy to Avoid.
Should I invest in single-factor or multi-factor ETFs?
Multi-factor approaches generally outperform single-factor strategies over full market cycles because they diversify factor timing risk. Single-factor ETFs like QUAL (Quality) or MTUM (Momentum) can work well as tactical tilts, but a diversified multi-factor approach reduces the risk of being heavily exposed during a factor drawdown period.
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