Dissecting equity momentum
Momentum has been the dominant driver of equity factor returns in 2026. More importantly, its effect has become increasingly centered within specific sectors, most notably Technology. This mirrors the growing concentration seen in market-cap indices, but with a critical distinction: dispersion in returns is now being driven as much by factor behavior within sectors as by the influence of a small cohort of individual stocks.
We have previously discussed how momentum and pro-risk factors have in aggregate performed very strongly in recent periods 1 amid increasing stock-level concentration in equity markets 2. However, the relative effectiveness of factor strategies such as momentum is not uniform across markets, with differences between sectors over the long term reflecting the underlying economics of different industries.
In long-duration growth sectors such as technology, returns tend to be more sensitive to sentiment and momentum signals, where valuations are typically more influenced by expectations of distant cashflows. In sectors considered to be more ‘stable’ and where cashflows are more predictable—such as Consumer Staples—valuation and quality signals have tended to be more reliable drivers of returns.
Historical data supports this intuition. Over the past two decades, sentiment has played a larger role in higher-growth sectors, while value, quality, and low-risk characteristics have been more effective in defensive and cashflow-stable areas of the market. Figure 1 shows long-term factor efficacy by sector over the past 20 years.
The current environment is more concentrated
What differentiates the current environment is not just strong momentum, but the degree to which that momentum has become concentrated in a narrow set of sectors.
In the first five months of 2026, sentiment-driven returns in Technology have been exceptionally elevated relative to both long-term averages and the post-COVID period (Figures 2 and 3). At the same time, lower volatility stocks within the sector have materially underperformed, indicating that investors have been willing to pay up for growth and momentum, while largely ignoring defensive characteristics. In other sectors, return drivers have been more balanced, with value seeing renewed support in parts of the market, even as quality has lagged more broadly—something we discussed in an article earlier this year.3
In the post-COVID era, the combination of value, quality, and sentiment working in unison has helped performance of many systematic strategies in a time of generally very low volatility.
Why does this matter?
Strong returns driven by a narrow set of signals and sectors can persist for extended periods. However, history suggests that such regimes can also be vulnerable to sharp reversals, particularly when leadership becomes crowded and highly consensus-driven. Importantly, this does not imply that a market correction is imminent. But a key question for investors is whether leadership broadens from here, or whether concentration intensifies further and what that means for volatility in factor returns.
From a macro perspective, several factors may be reinforcing the current dynamic. Continued enthusiasm around artificial intelligence and technology investment has supported growth expectations, while a relatively benign volatility backdrop and accommodative liquidity conditions has encouraged risk-taking behavior. Together, these forces have amplified the role of sentiment and momentum in driving returns. Should these conditions change, whether through shifts in interest rates, earnings expectations, or liquidity, a broader set of factors could reassert themselves.
For systematic investors, this highlights the importance of maintaining diversification across both factors and sectors. Relying too heavily on a single dominant driver, such as momentum, can leave portfolios exposed to abrupt changes in leadership. Instead, a more balanced approach seeks to capture multiple sources of return, ensuring that portfolios remain resilient across different market environments.
Our approach within Systematic Equity is explicitly designed for this type of environment. We combine a broad set of nuanced alpha signals across sentiment, value, quality, and catalyst themes, while actively controlling for sector and factor concentration. This ensures that portfolios retain exposure to prevailing trends, such as the current strength in momentum, without becoming overly reliant on a single driver of returns.
In an environment where both market and factor concentration are elevated, the ability to maintain breadth and balance becomes increasingly valuable. By diversifying exposures and embedding robust risk controls, we aim to deliver more consistent outcomes, while positioning portfolios to adapt as market leadership evolves.
In concentrated markets, we should not look on diversification as a drag on returns—it is what preserves them when leadership changes.