Quant Factors Swing the Most in Years Beneath Stock Market Calm

To the casual observer, the backdrop to this year’s record-breaking stock rally has been one of epic calm in markets. To Wall Street’s math wizards, it’s been anything but.

Quantitative traders who pick stocks based on rules like how cheap or how stable they appear — known as factors — are getting lashed by some of the most violent swings in years, as investors grapple with a US economy that continues to expand in the era of elevated interest rates.

While broad gauges of turbulence for equity benchmarks sit below their long-term average, the 60-day volatility of a strategy that buys small-capitalization stocks has surged near the highest in three years. A trade that bids up companies with strong balance sheets and reliable profits, known as quality, is the rockiest since early 2021. Even an investing approach that favors steady stocks is the least steady in a year, market-neutral Dow Jones indexes show.

Factor Volatility Is Picking Up

The volatility beneath the surface of rallying indexes is sending a message for both systematic traders and their discretionary peers: A risk-on rotation may be afoot as strategies sensitive to the US business cycle start to enjoy a spirited rally.

It’s early days yet. But any oncoming shift in investment preferences threatens the powerful dominance of a handful of Big Tech companies like Nvidia Corp., which is due to report earnings at the Wednesday market close. It would also prove a boon for little-loved factors this year known as size and value, while popular trades like growth and momentum would falter.