There is a consensus that equity factors are cyclical and depend on macroeconomic conditions. To build well-diversified portfolios of factors, one needs to account for the fact that different factors may have similar dependencies on macroeconomic conditions. The authors provide a protocol for selecting relevant macroeconomic state variables that reflect changes in expectations about the aggregate economy. They show that returns of standard equity factors depend significantly on such state variables. Factor returns also depend on aggregate macroeconomic regimes reflecting good and bad times. These macroeconomic risks have strong portfolio implications. For example, some equity factors depend on interest rate risk. Investors who already have exposure to this risk through bond investments may increase loss risk when tilting to the wrong equity factors. The authors also show that standard multifactor allocations do not sufficiently address macroeconomic conditionality. Combining factors may not reduce macroeconomic risks even for factors with low correlation. Understanding macroeconomic risks is a prerequisite both for risk transparency and for improving diversification of equity factor investments. TOPICS:Factor-based models; analysis of individual factors/risk premia; factors, risk premia