Report: May 2023 Factor Performance Analysis

Alex Lustig | June 14, 2023

Value is out, Growth is in, as AI-impacted stocks drive Style rotation

Market Background

In May, global equities experienced negative returns, specifically European equities undergoing a correction of 6% after a strong rally in the first four months of the year. Emerging Markets and US equities returned slightly above 0%, while the UK and Canada faced losses of 5% in the same period.

Growth stocks outperformed across multiple regions except in Emerging Markets, where Value stocks continued to lead. Alongside Growth, Quality subfactors generated excess returns in all regions, except the US, where investors showed preference for volatile equities over high-quality ones. Investors gradually shifted from defensive positions in Value and Yield and moved towards riskier equities with strong growth metrics. However, in Europe, Canada and the UK, the focus was more on stable growth, indicating a controlled approach to taking on risk.

One outcome stemming from the banking crisis in March was the initiation of a rotation into Growth as Value lost favor in comparison to Growth stocks in most regions. Additionally, the strong reception of OpenAI’s ChatGPT large language model sparked a rally in the US tech sector by semiconductor companies well positioned to capitalize on the growth of AI, which reinforced the transition into risk-on growth equities.

The labor market has displayed surprising resilience, indicating the US economy has managed to avoid a recession while inflation decreases. This contributes to a favorable environment for a smooth transition from the peak inflation experienced last summer.

During a press conference, Jerome Powell confirmed that “rates may not have to rise as much as expected to curb inflation” shortly before the latest CPI data confirmed the economy is still in disinflation, increasing by 4.0% YoY as of this month. The comments made by the Fed chairman, coupled with quantitative tightening and promising inflation data, suggests the Fed anticipates a lag before recent policy changes impact the economy. This may result in interest rates being held at their current elevated levels, as inflation continues its descent from June 2022’s 9.0% to the Fed’s 2% long-term target rate.

Gold prices remained stable at $1,963/TOz and Bitcoin saw its first negative return of the year, at -7%. This decline can be attributed to ongoing regulatory issues in the cryptocurrency industry. However, Bitcoin returned over 60% during the first half of 2023, supporting the rotation out of defensive, risk-off Value stocks, and more into risk-on assets such as Growth equities and cryptocurrency.

Factor Summary

  • US Equities: Growth and Volatility outperform significantly while Value and Yield trail behind
  • Europe: Quality, Growth, and Size outperform. Value, Yield, and Volatility underperform
  • Emerging Markets: Smaller factor premiums favoring Value and Quality over Growth and Volatility
  • Canada: Slight outperformance in Growth, Volatility, and Quality in the form of low gearing
  • UK: Mirrored Europe: Quality, Growth, and Size outperformed.

US Equities

In May, the US reverted to the factor performance trend observed at the end of the first quarter, Value stocks falling out of favor compared to Growth stocks. However, instead of emphasizing high-quality growth, investors this month shifted their focus towards companies with high earnings and sales growth while disregarding the stability of that growth, aligning with the more volatile growth segment.

Notably, stocks exhibiting exceptional sales growth and high one-year volatility, measured daily, outperformed the overall U.S. market by 2%. This significant monthly premium mirrors the trends observed earlier in 2023.

The introduction of OpenAI’s ChatGPT has generated considerable interest in AI during the second quarter. This has sparked a rally in the tech sector by semiconductor companies well positioned to capitalize on the growth of AI. Semiconductor companies Nvidia (+35%) and AMD (+30%) led the outperformance in sales growth equities.

Other prominent tech companies that endured significant downturns in 2022 also contributed to this outperformance. In addition to Nvidia and AMD, Tesla (+22%), Amazon (+13%), Alphabet (12.7%), Microsoft (+5.8%) and Meta (8.8%) have largely supported the performance of indices such as the S&P 500 and the Nasdaq this month, which have technically entered a bull market, rising +20% since their mid-October lows.

Figure 1: May 2023 US Factor Performance (sector adjusted)
Source: Investment Metrics, a Confluence company

European Equities

By the end of April, European stocks realized superior returns compared to the other regions in this report, delivering a favorable 13% year-to-date return. However, this positive trend experienced a reversal in May, as the region underwent a 5% correction.

During May, both Quality and Growth stocks outperformed the European equity market. This aligns with the patterns observed in March of this year, wherein companies with a favorable return on equity and low levels of debt were preferred by investors.

Contrary to the market neutral performance seen in April, Value stocks have consistently underperformed in the European equity market since February. Investors instead shifted focus towards large cap companies with stable and increasing earnings, as opposed to the more aggressive volatile growth seen in the US.

Unlike in the US, where companies that outperformed within sales growth were concentrated within the tech sector, European sales growth outperformance took place in several sectors. In the German utilities sector, Uniper SE (+54%) announced expected profits to exceed over $2B through 2024, confirming the replacement of Russian Gas supply is not only complete, but profitable. Other names like auto manufacturer, BMW (+5%), and eye care device company, Alcon AG (+6.45%), supported this outperformance.

Figure 2: May 2023 Europe Factor Performance (sector adjusted)
Source: Investment Metrics, a Confluence company

UK Equities

Investors have clearly shifted away from defensive positions in Value and Yield and once again embraced growth equities, with an emphasis on high quality growth similar to other regions. Specifically, companies with high returns on equity and stable earnings delivered outperformance by 110 bps and 50 bps, respectively.

In the UK, the trend in factor performance closely followed that of Europe, albeit to a greater extent. Investors avoided volatility and favored growth subfactors (apart from dividend growth, which is strongly correlated with Yield), which outperformed by at least 80 bps. This contrasts Europe, where the highest outperforming subfactor was sales growth over five years, delivering excess returns of 60 bps.

This trend is a continuation of what was observed in March, where Value and Yield factors underperformed. However, in the current month, the outperformance realized by Quality stocks, particularly those which also have high growth prospects, significantly surpassed the returns witnessed in March.

Companies with high returns on equity that delivered excess returns include industrial equipment rental company, Ashtead Group (+5.5%); infrastructure-focused private equity firm, 3I Group (+9%); and infrastructure company delivering plumbing and heating products, Ferguson (+3%).

Figure 3: April 2023 UK Factor Performance (sector adjusted)
Source: Investment Metrics, a Confluence company

While Value and Yield factor had been dominant in Emerging Markets equities year-to-date, the factor premium in the region experienced a significant decrease this month, amounting to just 30bps. This represents just 15% of the premium achieved by companies with a strong dividend yield in April.

The overall trend in factor performance aligns with the pattern observed over the last two months, albeit to a much smaller extent. Value and Quality factors realized slight outperformance along with companies with forecasted revisions over the next 12 months.

Emerging Markets Equities

However, there were notable exceptions to this trend. The performance of companies with favorable dividend yields reversed, and there was a sudden outperformance of stocks with a high market beta, subfactor of Volatility. These exceptions suggest investors in Emerging Markets have gradually begun to shift away from a strong defensive position, opting for a controlled increase in risk.

Figure 4: May 2023 Emerging Markets Factor Performance (country and sector adjusted)
Source: Investment Metrics, a Confluence company

Canadian Equities

In Canada, the factor performance trend mirrored that of the US and Europe, with some small variations, while equity returns aligned with those of the European market. Unlike Europe, investors especially focused their attention on companies with low levels of debt, while other measures of Quality such as stability, profitability and return on equity, underperformed.

Apart from the outperformance of stocks with a low gearing ratio, the overall trend in Canada matched that of the US. There was a focus on forecasted growth as well as short-term and long-term volatility, all of which surpassed the performance of the overall Canadian market by at least 50 bps.

Figure 5: May 2023 Canada Factor Performance (sector adjusted)
Source: Investment Metrics, a Confluence company

Appendix: How to read the charts

Each factor’s performance is based on the relative performance of its top 50% of stocks by market cap, compared to the overall market. The Size factor uses the top 70% of stocks, as the only exception.

For example, for the book-to-price factor, we determine the period’s performance of the basket of stocks with the highest book-to-price values, relative to the total market. Each factor is analyzed independently, market and fundamental data are adjusted to enable sector-average (within each country) relative data to be used, and the performance measurement isolates the factor’s contribution to return.


The information contained in this communication is for informational purposes only. Investment Metrics, a Confluence company, is not providing, legal, financial, accounting, compliance or other similar services or advice through this communication. Recipients of this communication are responsible for understanding the regulatory and legal requirements applicable to their business.

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