It is surprising and potentially alarming that financial leverage has been a powerful driver of stock returns during the market rally over the past year. For stocks in the S&P 500, the sector-neutral long-short factor return for debt/equity was 12% since October 31, 2023, with an impressive 2.7 information ratio. In contrast, the ROE and price momentum factors returned 7.7% over this period, with a 1.3 information ratio for ROE and a 0.6 information ratio for momentum.
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