Factor Valuations: Current vs Historical 

What’s cheap, what’s expensive?

July 2024. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • Some factors are trading at historically low valuations
  • Cheap stocks are cheap, high momentum and profitable ones are expensive
  • However, it also depends which valuation multiple is used

INTRODUCTION

Cliff Asness of AQR Capital Management has been vocal for several years about traditional equity factors – like value – trading at historically cheap levels. More recently, a team at Research Affiliates echoed a similar sentiment, noting that many smart beta strategies appear attractively priced, stating, “we expect nearly every investing style featured here to outperform.”

But how do we determine whether a factor is cheap or expensive?

The standard method is to treat factors like individual stocks. For long-short factor portfolios, we evaluate the valuation spread between the long and short sides, then compare that spread to historical norms (read Cheap vs Expensive Factors). For long-only portfolios, we assess their valuation levels either relative to their own history, other factors, or the broader market.

In this article, we’ll examine how current valuations of factor-based portfolios stack up against their historical averages.

FACTOR VALUATIONS

Our analysis focuses on long-only, factor-based portfolios within the U.S. equity market, which includes currently approximately 2500 stocks. Specifically, we construct nine portfolios by selecting the top 10% of stocks based on different metrics: price-to-book (P/B) ratio, price-to-earnings (P/E) ratio, market capitalization, sales growth, earnings growth, volatility, leverage, momentum, and profitability.

While several valuation metrics exist to assess how cheap a stock or factor is, we use P/B and P/E ratios due to their broad applicability across the market.

Portfolios based on high sales and earnings growth traded at similar P/B multiples to the overall U.S. stock market and followed similar valuation trends from 2004 to 2025. In contrast, portfolios emphasizing value (low P/B and P/E ratios) and small-cap stocks traded at signi