Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / How Bull Markets Are Reshaping Factor Investing in 2026
Transcript
- Lucas: So the S&P 500 is sitting at 7,537, the Nasdaq just hit another all-time high, and yet the Russell 2000 is flat over the past five days. That tells me factor investing in this bull market is getting weird. Luna: Weird how? I mean, growth has been leading for a while now. That's not new. Lucas: Right, but look under the hood. Traditional value factors have been dead money for years, but what's interesting is that even momentum is acting differently. Usually, momentum strategies ride winners — but in this market, the winners are so concentrated in ai related names that a pure momentum play might just be a bet on three or four stocks. Luna: So you're saying momentum factor has become a de facto AI fund? Lucas: Exactly. And that creates what I'd call a momentum trap. You look at Palantir, up 14.6 percent in the last five days alone. That stock is now at 132, which is a huge move. But if you're running a quantitative momentum model, you're forced to buy it, even if the valuation has detached from any fundamental anchor. Luna: And that's where the trap is. You buy the momentum, but you're also buying a ton of single-stock risk dressed up as a factor. Lucas: Precisely. Meanwhile, the low-volatility and quality factors have been quietly crushing it. Think about it — in a market that's up over a percent in a week, you'd expect low-beta stocks to lag. But they haven't. They're actually holding their own because investors are nervous about the narrowness of the rally. Luna: I saw that too. The iShares S&P 100 Low Volatility ETF is up about the same as the broad market over the past month. That's not typical for a bull market this mature. Lucas: Right. And that brings me to the value factor. The classic Fama-French value portfolio — cheap stocks relative to book value — has been a disaster for almost a decade. But there's a twist. If you look at value within the tech sector, it actually works. Apple and Microsoft, for example, trade at reasonable multiples compared to the high-growth names, and they've been steady performers. Luna: So it's not that value is dead — it's that value is sector-specific now? Lucas: I think so. The old model of 'buy any cheap stock and wait' is broken because the economy is so bifurcated. The winners are becoming monopolies, and the losers are value traps. That's why multi-factor approaches are gaining traction — blending momentum, quality, and value within sectors. Luna: Let's talk about the size factor. The Russell 2000 is basically flat this week, while large caps are up. That's been the story for years now. Small caps just can't catch a bid. Lucas: And that's despite a relatively benign interest rate environment. The fed funds rate is at 3.63, flat for months. Normally, that would be a tailwind for small caps because they're more sensitive to borrowing costs. But the market is saying the risk is elsewhere — maybe earnings uncertainty, maybe the lack of AI exposure in the Russell. Luna: Right, because the Russell has very few ai native companies. It's mostly industrial, financial, and healthcare. So the market's AI obsession is starving the small-cap factor. Lucas: That's a great way to put it. And then there's the dividend factor. We did an episode on that recently, but it's worth noting that dividend stocks are actually underperforming in this phase of the bull market. The Vanguard High Dividend Yield ETF is up less than the S&P over the past year. Investors are willing to forgo yield for growth, which is classic late-cycle behavior. Luna: But late cycle doesn't mean imminent crash. It just means the factors that worked early in the cycle — small cap value, high beta — are not the ones working now. Lucas: Exactly. So the practical takeaway for listeners is: don't just buy a factor ETF and assume it captures what it used to. Momentum today is not the momentum of 2010. Low volatility today is not the low volatility of 2008. You have to understand what the factor is actually loading on. Luna: And that requires looking under the hood — like, what are the top holdings of that momentum ETF? Lucas: Right. Because if it's full of the same five AI stocks, you're not diversifying. You're concentrating. And that defeats the purpose of factor investing, which is supposed to be a systematic way to capture risk premia. Luna: So what's the smarter move right now? Stick with a multi-factor approach, or tilt toward quality and low vol? Lucas: I'd argue a barbell. On one side, hold quality and low volatility for stability. On the other, have a small allocation to momentum — but cap it, and rebalance frequently. Because the momentum factor can reverse violently if the AI trade unwinds. Luna: Speaking of unwinding, we should note that the VIX is still relatively low. So the market isn't pricing in a lot of fear. But that could change quickly. Lucas: It always does. But I think the key insight from today is that factor investing is not a set-it-and-forget-it strategy. The bull market is reshaping how factors perform, and investors need to adapt. Luna: Before we wrap, I want to say that if you found this conversation useful — and especially if it made you think differently about your own portfolio — these episodes stay ad-free because of listener support. Lucas: Yeah, it's a small thing, but it makes a big difference. You can help keep the show going by buying us a coffee at buy me a coffee dot com slash fexingo. That's all lowercase. And honestly, it just helps us keep doing deep dives like this without any sponsor noise. Luna: Exactly. And we really appreciate it. Now, back to factors — one thing I'd add is that we're seeing a lot of new factor ETFs launching that try to capture the AI theme. Like 'AI momentum' or 'AI quality'. Lucas: Which is both interesting and a little gimmicky. Because if you strip away the label, they're just concentrated tech funds. But if they help investors actually stay disciplined and rebalance, maybe that's okay. Luna: I guess the real question is: can factor investing still deliver alpha in a market that's so driven by narrative and momentum? Lucas: I think it can, but only if you're willing to be more nimble. The days of buying a value ETF and forgetting about it for ten years are probably over. But for active investors who pay attention to factor exposures, there's still plenty of opportunity. Luna: And that's a good note to end on. Thanks for listening, everyone. Lucas: We'll be back tomorrow with another angle on this bull market. Until then, keep your factor exposures intentional.