Don't Expect Fireworks From Stocks As Momentum Lags

Authored by Simon White, Bloomberg macro strategist,

Stocks are likely to underperform while momentum is weak, reducing the possibility of a strong rally into year end.

US stocks seem to have been finding their feet after the recent selloff, notwithstanding the disruption to this morning’s trading from the CME outage.

But standing back from this short-term upset, the type of shares now outperforming suggest that any market advance is likely to be lacklustre.

Year-to-date, the best performing factors are momentum and trading.

The first is just the (beta neutral) performance of a basket of stocks with the most positive momentum, as measured by their one-year performance.

The trading factor is based on stocks with the highest turnover, and has been outperforming this year as buybacks have surged.

As we can see from the chart (ordered left to right by the best performing factors over the last month), value is now the best performing factor, followed by momentum, while the trading factor has slipped almost to the bottom.

We can thus infer that buyback activity has slipped recently, removing an erstwhile strong driver of the rally for now.

Typically, November and December are the best two months for buybacks.

We will see if this activity picks up again before year end, but given the tech sector has been the main actor in this area in 2025, leaner balance sheets after such large capital expenditures may deter them from buying back much more of their own stock.

If buybacks are less likely to charge any rally, perhaps pure momentum can carry the day? But that factor is now underperforming the index itself.

As in the chart below, when the momentum factor is underperforming the overall index on a quarterly basis (blue periods in chart) - as it has been in recent months - it is often consistent with tepid or outright poor returns in the index.

On the other hand, the rally tends to be in good shape whenever momentum is outperforming (pink periods).

The numbers make it clear. Over the last 25 years, the market has on average delivered a daily return of 0.35% when momentum is in a positive regime, and 0.22% when it’s in a negative regime, versus an overall average of 0.30%.

As previously discussed numerous times, liquidity is supportive of stocks, so anything worse than a mid-rally correction shouldn’t be on the cards for now.

But given the set up, we shouldn’t expect a rip-roaring rally into year-end either.