Macro risks impact equity factor investing. Equity factors (value, momentum, size, low risk, high profitability, and low investment) show cyclicality associated with some macro variables. Bundling risk factors together unconditionally will add value when forming a portfolio; however, accounting for macro risk surprises will provide further insights on the spread or sensitivity of these premium. Looking at short rates, the term premium, the credit premium, dividend yields, and market illiquidity can all provide better insights on the conditional movement in equity risk factors and are easily employed in any model of risk premium. See "Macroeconomic Risks in Equity Factor Investing".
All the primary risk factors show a systematic relationship to one or more macro variables. Short rates and the term premium seem to be the most important macro variables. Clearly, they represent changes in the economy and monetary policy. Increases in short rates will negatively affect size, volatility, and the investment premium. Increases in the term premium will have a strong negative impact on momentum, profitability, and investments, but will have a positive impact on value. Default or credit spread will have a positive impact on profitability.
The macro regime matters on equity factor risk premium. This has been known for some time. This papers quantifies the impact of macro surprises on various risk factors. If you don't account for where you are in the economic cycle, you factor exposures will harm your portfolio return. Of course, the problem is now determining what economic regime you are in or where you are headed.
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