AQI Factor Equity Model Update | Q4 2025

August saw a brief “reversion to the mean,” as factor composites that had been underperforming for the majority of the year finally had their day in the sun. More value-oriented factor composites, such as high dividend, pure value, value, and equal weight outperformed the S&P 500 over the month of August, while quality, growth, and momentum took a back seat underperforming the broader index slightly. The S&P 500 was up 2.0% over the month of August, while many Value-oriented factor composites saw returns between 4-6%.

The breadth of companies to outperform the S&P 500 widened, with more than half of S&P constituents outperforming the broad index return. In August, 54.1% of S&P 500 constituents outperformed the benchmark, while value indices saw 70-80% of their constituents outperform.

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August saw the initiation of the factor strategy quarterly rebalance, as a fresh set of factor data was generated within corporate earnings reports. The usual quarterly process included an economic review, to determine the overweighting/underweighting to each individual factor.

Factor weightings are determined by an analysis of current economic regime, with the regimes being defined as follows:

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Consensus was reached that the economy is in slowdown status - growth remains positive, but momentum has moderated. Q2 GDP growth was boosted by a decline in imports, but underlying demand cooled: real final sales to private domestic purchasers rose 1.2%, down from 1.9% in Q1. Post-tariff effects are emerging as higher costs and shifting trade flows influence both household spending and corporate caution. The labor market also saw moderation as well, as revisions to jobs numbers showed a very minor increase in job creation over summer months, and the unemployment rate reached 4.3% in August. With growth slowing, the Fed appears poised to begin preparing markets for a potential September rate cut.

Despite the slowing of GDP and job creation, several leading economic indicators point to a low risk of recession, with corporate earnings, wage growth, housing permits, truck shipments, and credit spreads all showing relative health.

Broadly, a slowdown coincides with strong performance from the quality factor. As economic data softens, companies with the ability to show resilience against potential economic downturn tend to outperform the broader market (through cash flow and healthy balance sheet metrics). Factor screening as a result overweighted the quality factor, with an underweight to value after its strong August.

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The resulting blended factor portfolios saw slight changes in sector weight as a result of the above-mentioned screening. The below image demonstrates the changes in sector weight from previous quarter weights to current:

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Largest increases occurred in the Industrials, Technology, and Energy Sectors, while Consumer Staples, Health Care, and Materials saw the largest declines.

Relative to the S&P 500, we continue to see the largest underweight to technology and comms sectors (due to the cap-weighted approach of the index), with industrials and energy maintaining the largest overweight:

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Between political tension, the rapid development of artificial intelligence, and a Federal Reserve caught between high inflation and weakening jobs data, today’s market crosscurrents create a challenging backdrop for interpretation. In such an environment, a consistent, proven, process-driven approach can offer clarity and direction. We continue to view the factor approach as a scientific way to derive the signal amidst the noise.

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