Momentum Is 2026's Best Factor. It Still Needs a Chaperone
There's an old market truism that trends persist. It sounds like folk wisdom, but it's one of finance's most durable findings: stocks that outperform over the past 6 to 12 months often continue outperforming over the next several months. Researchers have documented this effect, known as price momentum, across stocks, bonds, currencies, and commodities for more than a century.
Through the first half of 2026, the S&P 500 Momentum Index gained more than 36%, versus 10.2% for the S&P 5001, driven largely by AI capital spending and strong earnings momentum across much of the technology sector.
Why does it work?
Investors don't fully reprice stocks all at once. Strong earnings and improving fundamentals are absorbed gradually, then reinforced as more investors pile into winners. The early move reflects information. The later move reflects enthusiasm.
Why that's dangerous by itself
Enthusiasm eventually fades. When it does, momentum can reverse sharply. Following the financial crisis, a standard momentum portfolio lost roughly 73%² in just three months as the market's worst performing financial and cyclical stocks staged a historic rebound while the defensive stocks favored by momentum investors lagged. Momentum also says nothing about valuation or business quality. A stock can have strong price action while the underlying business deteriorates.
How we think about the momentum factor
Momentum is one of three key factors we consider before investment:
1. Price momentum. Is the market already recognizing the company's strength? Positive price momentum helps investors avoid value traps.
2. Valuation. Are we paying a reasonable price? This helps prevent buying into excessive optimism where prices become disconnected from fundamentals.
3. Capital stewardship. We favor management teams that generate strong free cash flow, reduce share count over time, and avoid unnecessary capital spending. Companies that consistently generate excess free cash flow can continue investing, repurchasing shares, and paying dividends even when financing conditions tighten.
Why the combination works
Each factor offsets the weaknesses of the others. Momentum helps identify companies gaining market recognition, while bottom-up fundamental analysis determines whether the valuation is justified and whether management has demonstrated disciplined capital stewardship. Together, these factors provide greater confidence in the durability of long-term shareholder value creation.
Why we're comfortable with this
This approach won't always own the market's hottest stocks, and in years like 2026 it may trail pure momentum during the strongest rallies. We're comfortable with that trade off. By requiring momentum, reasonable valuation, and disciplined capital stewardship to align, we're investing in businesses with both strong fundamentals and favorable market trends, not simply betting that investor enthusiasm will continue.
Momentum can be a powerful signal, but it works best when paired with sound valuation and disciplined capital stewardship. That's the framework we use at Altman Advisors to build portfolios designed to participate in long-term market trends while managing risk. If you're evaluating how momentum fits into your investment strategy, we'd welcome the opportunity to discuss your goals.
1. S&P Dow Jones Indices. S&P 500 Momentum Index.
2. Kenneth R. French Data Library, UMD (Momentum) Factor.
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