Contextual Concentration: Time to Rotate Your Factors

It’s annual outlook season and the view ahead is as clear as ever. Not very. Most strategy notes this time of year all feel a little too similar. Each one starts with a 16oz fillet of third-quarter macro data, adds a healthy portion of trend-following l’asperge, and tops it off with a dash of au poivre reflection bias (what strategy is best for my business?).

To validate just how well perfected this recipe is, we can use a quick check with everyone’s favorite chef, ChatGPT. The cumulative recorded knowledge of humanity delivers this insightful version of the 2025 US equity market outlook: “While I can’t predict specific outcomes, here are my key considerations:  Economic Growth, Interest Rates, Inflation, Earnings, Geopolitical Factors and Technological Advances.” . . . thank you, Rufus, Karla, Deisy, Pooter . . . or whatever your cool AI name is. Let me now go invest.

What is an asset allocator to do? Well, we have a couple of ideas. First, let’s look at 2024. It’s been a wonderful year for equity investors. We’ve had to make very few decisions to keep ahead of the competition.

The fewer the better, in fact, because 2024 has been one of the best years for Momentum we have ever seen. It’s also been a broader trend-following year than you might guess.

As a sample, some of the top names in the Momentum Index include Walmart, Booking.com, JPMorgan Chase and/or favorite party animal, Nvidia. The trick has been to sit still and let your winners run.

Momentum is one of the most powerful and profitable dynamics in markets. In our framework there are four compounding elements that fuel the factor: 1) Price, 2) Sentiment, 3) Flows and 4) Fundamentals – each with a longer half-life. When all four momentum contributors align, we see years like 2024 unfold. But what happens when the party hits its peak? Relying on our reliable and unemotional friends at Empirical Research, the answer is that 70% of the time momentum underperforms the broader market after a year like this. That’s a base-rate that catches our attention. Not to say we know the future, causing us to run for the hills on the Momentum factor; but what it does say is that maybe it’s time to start warming up for that run.

So where do we think the intrepid investor should investigate new ideas? We believe Value and Stability look pretty good as primary stock characteristics. Among value stocks, the laggards in Energy and Healthcare standout as attractively priced relative to both recent and expected cash flows in the sectors. For Stable stocks, the attraction comes from sustainable Returns on Invested Capital (ROIC), low leverage and a general stability of earnings and expectations. A consensus harbor in a storm is not a bad place to be as the Momentum market hits historical extremes.

Important Disclosures & Definitions

MSCI USA Momentum Index: captures large and mid-cap stocks of the US market and is designed to reflect the performance of an equity momentum strategy by emphasizing stocks with high price momentum, while maintaining reasonably high trading liquidity, investment capacity and moderate index turnover.

MSCI USA Momentum SR Variant Index: aims to reflect the performance of the MSCI USA Momentum Index, wherein all changes driven by the index rebalances of the MSCI USA Momentum Index are distributed over three days leading into the rebalancing effective date. 

S&P 500 Index: widely regarded as the best single gauge of large-cap US equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

One may not invest directly in an index.

AAI000855  12/17/2025