Momentum Shift in US Stocks Sparks Concerns of Reversal
Equity Momentum Transformation
In recent weeks, the landscape of equity momentum has undergone a significant shift, altering the course of a robust start to the year across various regions. This change, excluding China, marks a departure from the previous dovish trend that prevailed at the end of last year.
US Momentum Factor Dominance
The US momentum factor has surged in recent months, delivering impressive risk-adjusted returns that have outpaced market expectations. Amid concerns of market concentration, investors are wary of a potential reversal, fearing a decline in equity valuations.
Optimistic Outlook Amidst Concerns
Despite fears of a market downturn, analysts at Goldman Sachs remain optimistic. Historical data suggests that periods of high market concentration and momentum often lead to ‘catch-up’ rather than ‘catch-down’ scenarios. The US momentum factor, driven by reflationary growth, has seen a notable uptrend, with cyclicals playing a pivotal role in its success.
Market Resilience Amidst Uncertainty
While equity momentum has bolstered risk appetite, concerns linger regarding a possible market reversal triggered by a substantial US rate shock. Analysts caution that unexpected developments in key central bank meetings could disrupt the current momentum and sentiment.
Europe’s Defensive Position
Should setbacks occur, particularly due to a rate shock, European stocks are poised to adopt a defensive stance compared to their US counterparts. Despite remaining bullish on equities, Goldman Sachs is cautious about near-term price targets, indicating limited upside potential.
Strategic Approach in Volatility
To weather potential volatility, analysts advocate a ‘buy the dip’ strategy in alignment with their baseline macroeconomic outlook. They foresee opportunities for growth and inflation normalization in the event of a market setback.
