What Drove Momentum’s Strong 2024 — and What It Could Mean for 2025

Are Momentum stocks’ excess returns in 2024 the result of an unusual confluence of factors? Can we expect these trends to hold strong in 2025 or should we prepare for a dot-come bubble-like fall?

In 2024, Momentum ranked as the best-performing factor for the US, developed ex-US, and emerging market regions for the fourth time in the past 20 years.¹ And US Momentum’s rolling 12-month excess return to the S&P 500 is now in the 96^th percentile over the past 50 years.² Only in 2000 were excess returns greater than they are now.

But the factor’s strength may be reaching its limits.

While I’m not suggesting timing factors, digging into the details of Momentum’s torrid 2024, where there might be some froth, can help us consider what may be in store for 2025.

Strong Returns Extend Beyond the Three Major Markets

The strong performance of Momentum’s subcomponents and different methodologies reflects the depth of the Momentum trend (Figure 1).

Europe, Asia, US mid caps, and US small caps all had strong excess returns relative to their local market cap-weighted benchmarks, with mid caps posting the largest calendar year excess return since 1998 (+25% now versus +31% then).

Meanwhile, the rolling 12-month returns for both US large cap and US mid cap Momentum approached excess returns close to their dot-com peaks (Figure 2). While fading somewhat over the last few months of 2024, both market cap Momentum measures enter 2025 trading in the upper 90^th percentile.

Viewed alone, this creates some anecdotal, not empirical, cause for concern. That’s because when excess returns reached these levels that one time, a sizable crash followed.

Durable Growth and Balance Sheets Fuel Momentum

Momentum’s build up leading to the dot-com bubble was driven by speculation on firms with weak profitability. Today, Momentum holdings have more durable growth prospects and balance sheets.

For example, the constituents of the S&P 500 Momentum Index have a net-debt-to-EBITDA (a measure of leverage) below that of the market (0.98 versus 1.5) alongside a return on assets (ROA) that matches the market (16.2% versus 16.6%), but higher expected growth over the next three to five years than the market (22.5% versus 16.7%).³

Those fundamental traits help explain Momentum’s strong returns in 2024. Momentum entered 2024 holding high growth names, and the market gravitated toward areas with quality balance sheets featuring robust growth and cash flow generation.

This desire for growth pushed both returns and valuations higher. Momentum stocks trade at a price-to-earnings (P/E) of 28, or 33% above their historical average.⁴ They also trade above the market’s 24 P/E valuation.⁵ Yet, momentum usually trades at a premium to the market (on average 13%).⁶ So, Momentum’s relative valuation is just slightly above the historical average.

But other fundamental metrics such as price-to-book, price-to-next-12-month-earnings, and price-to-sales show Momentum trading above its own historical averages.⁷ Those premium valuations are another minor area of concern as they reflect a higher bar of discounted future growth expectations for this collection of stocks to jump over.

Measuring Momentum’s Strength With Quantitative Methods

The above analysis shows long-only exposures most associated with ETFs. Those measures can have other biases, given their constraints. Yet, from a pure factor perspective, various market neutral long-short Momentum baskets also had above market returns.

The Morgan Stanley US Momentum Basket and the Dow Jones US Thematic Market Neutral Index outperformed the S&P 500 Index by 29% and 7%, respectively.⁸ And the Bloomberg US Pure Momentum Index, constraining for market, sector, and other factor effects, had a positive 10% return.⁹

So, what drove all this Momentum madness? Plain and simple, Momentum started the year exposed to high growth names. And high growth names being continuously bid up throughout the year led winners to keep winning. Attribution supports this.

Factor-based attribution reveals Momentum’s success was not driven by a sector bias (i.e., “It’s just Tech”) or being higher risk in a market featuring low levels of volatility (i.e., “It’s just high beta”). Instead, it was the factor itself (i.e., owning recent winners) that powered returns (Figure 3).

Style effects contributed only 38% of Momentum’s overall outperformance (7.19% versus 20.8%). Stock specific risks were more noticeable drivers, while industry effects had no real impact.¹⁰ This holds true across other US large cap Momentum methodologies, as well as for US mid cap.

US small cap and non-US regions style effects were Momentum factor driven (Figure 4), however. And mid caps would have had similar return contributions if it were not for one stock driving more than half of the stock-specific effects.¹¹

Stocks’ impact was more pronounced in US large caps and most pronounced in the more concentrated S&P 500 Momentum Index due to four dynamics for US large caps in 2024:

• Just 29% of the S&P 500 beat the S&P 500 itself, with the average stock returning 14.8% versus 24.9% for the market.¹² 
• Most of the market's returns were driven by just a handful of stocks. The top 10 stocks drove 60% of the market’s return and the top 25 drove 75%.¹³
• Of those top 10 stocks driving performance, five are found within Momentum’s top holdings. 
• Returns were concentrated in some of the same winning stocks for the second year a row.

The overlap of Momentum’s holdings underscores the impact of prior winners winning. Thirty-five securities held at the end of 2024, 50% of the current exposure were also held at the end of 2023 in the S&P 500 Momentum Index.¹⁴ For reference, only 15% of 2023’s exposure was from the holdings in 2022.¹⁵

It Could Be Tough for Momentum to Repeat This Year

Since 1990, in seven of the 11 times Momentum was the best-performing US factor (not including 2024), excess returns were negative the next year. The average excess return was -5% in those seven years compared to -2.25% in any year after Momentum was the top performing factor.

This historical trend combined with rolling returns at elevated levels, valuations trading at richer premiums than usual, and idiosyncratic factors constituting a large portion of long-only ETF-related momentum outperformance, mean more arrows point down than up for Momentum to repeat in 2025.

And this could have broader ramifications if the current collection of Momentum does fade. Five of the Magnificent Seven stocks were the top contributors to S&P 500 Momentum Index’s stock specific return. So, if there is a retreat, those stocks will drive Momentum’s future along with the market’s.

Understanding these single factor shifts can help inform market sentiment and factor portfolio construction. As a result, given that single factors are prone to market cyclicality, like Momentum is now, a diversified mix of factors may be a more sensible way to harness factor premia, while remaining balanced for when factors begin to test their limits.