Why Momentum Can Still Work

Momentum can continue to outperform because current price strength is being reinforced by unusually strong earnings momentum, although crowding and macroeconomic shocks remain significant risks.

• Momentum ETFs and baskets have outperformed over the past 12 months and year-to-date despite a significant pullback in June and early July.
• The factor is overweight technology, especially semiconductors, as well as energy and communications, where three-month earnings-expectation revisions have been strongest.
• Semiconductor companies, the largest industry in most momentum baskets, are expected by Bloomberg to deliver more than 100% earnings growth this year, while the technology, energy and communications sectors show the strongest changes in 12-month forward estimates.
• Long-short baskets that bought winners and shorted losers fell by 20% or more within weeks during the June and early-July sell-off, which the author attributes mainly to excessive crowding and leverage rather than deteriorating fundamentals.
• The sell-off and continued earnings growth have left some momentum names also looking like value stocks, but the strategy remains vulnerable to a sharp rise in rates or a broader equity-market downturn.

Takeaway: Investors can still favor momentum while rates remain contained and economic growth holds up, but should recognize that the factor is concentrated in volatile technology and semiconductor stocks and remains exposed to renewed crowding.