What a soft landing means for the momentum trade

Investing.com — According to analysts at Piper Sandler, 2024 is shaping up to be “one of the best years for momentum strategies in over a decade.” 

Despite concerns around high valuations and crowding, they argue that the momentum trade will likely continue to thrive until “we see a broader improvement in the earnings picture across equities.”

While aggregate S&P 500 earnings have remained resilient, Piper Sandler points to a “bifurcation of EPS momentum” within the index, with mid- and small-cap earnings estimates continuing to fade. 

The analysts highlight that momentum is being driven by quality factors like profitability, noting, “Momentum strategies are the top performing strategy across each of the size and style indices on a sector-neutral basis.”

Piper Sandler also addresses the intersection of momentum with quality stocks. They emphasize that quality strategies, which are currently fueling the momentum trade, tend to perform well during economic soft landings. 

“People may be surprised to see that quality actually has consistently outperformed in all four soft landing episodes,” the analysts wrote.

In contrast, the report explains that post-recession recoveries typically favor cyclical stocks and riskier assets, leaving quality stocks behind. 

“In recessions, the spring gets tightly coiled for a sharp rebound in risky equities and cyclicals, and thus quality tends to get left behind in post-recession recoveries.”

The report offers a positive outlook for momentum investors heading into the seasonally strong part of the year. 

Piper Sandler concludes that unless there’s a significant shift in the earnings landscape, the momentum trade will remain dominant, especially given its strong foundation in quality factors. 

The firm believes this suggests that, in the event of a soft landing, momentum strategies could continue to outperform, providing a compelling opportunity for investors.