\n
![](\"https:\/\/fortune.com\/img-assets\/wp-content\/uploads\/2024\/03\/GettyImages-2118008225-e1711822094669.jpg?w=2048\")
<\/p>\n [ad_1]
\n<\/p>\n
The simplest stock strategy on Wall Street \u2014 beloved by the smartest minds in finance and more \u2014 just closed out its best quarter in more than two decades.<\/p>\n
Now a cohort of investment pros from JPMorgan Chase<\/a> & Co. to PGIM Quantitative Solutions are ramping up warnings that the\u00a0trend-chasing<\/a>\u00a0trade looks ripe for a crash.<\/p>\n Known as the momentum factor, the rules-based investing style that buys up\u00a0winners<\/a>\u00a0over the past year like the mighty Nvidia<\/a> Corp. \u2014 while selling losers like Warner Bros. Discovery<\/a> Inc. \u2014 has notched its best quarter since 2002, according to a long-short\u00a0portfolio\u00a0compiled by Bloomberg.<\/p>\n Investors have bought into the\u00a0artificial-intelligence<\/a>\u00a0promise in droves, sending\u00a0valuations<\/a>\u00a0for the stock market\u2019s biggest winners soaring on bets this game-changing technology will rain profits in the years ahead \u2014 regardless of the twists and turns in the American\u00a0economy<\/a>.<\/p>\n Yet the relentless US economic expansion is starting to lift up underloved corners of the stock market, just as the Federal Reserve stirs chatter it\u2019s becoming\u00a0more tolerant<\/a>\u00a0than expected of\u00a0still-sticky inflation<\/a>. That\u2019s raising the prospect new equity winners will emerge soon enough like energy and\u00a0small caps<\/a>\u00a0\u2014 two\u00a0sectors\u00a0that have sorely lagged the American\u00a0market<\/a>\u2019s frenetic rally over the past year.<\/p>\n These kinds of projections have misfired again and again with high performers like Meta Platforms<\/a> Inc. posting an\u00a0earnings bonanza<\/a>. Yet any sharp rotation out of the winners in favor of the losers \u2014 a potentially healthy outcome for the broader market \u2014 would come at a particularly painful time. Momentum is among the factors that have seen the largest increases in crowding this year, Sanford C. Bernstein data show, while investors have\u00a0piled\u00a0$2 billion into the strategy via exchange-traded funds.<\/p>\n \u201cWe may be at higher risk of a momentum crash because inflation might not come down as smoothly as equity markets are expecting,\u201d said\u00a0Stacie Mintz, head of quantitative equity at PGIM Quantitative Solutions. \u201cTiming momentum is tricky \u2013 it\u2019s like riding a wave and trying to decide when to jump off before it crashes.\u201d<\/p>\n In this holiday-shortened week before the release of key inflation data Friday, the small-cap Russell 2000 rose 2.5% and a long-short value\u00a0strategy<\/a>\u00a0posted its fourth straight week of gains \u2013 both signs of a market shift that\u2019s favoring riskier trades.<\/p>\n The S&P 500 rose 0.4% this week while the Nasdaq<\/a> 100 slipped 0.5%. In a throwback to the heady days of 2021, Donald Trump\u2019s Trump Media & Technology Group Corp\u00a0surged<\/a>\u00a0after going public through a blank-check merger.<\/p>\n The stock mania has offset choppy trading in Treasuries with a Bloomberg-compiled 60\/40\u00a0portfolio<\/a>\u00a0up 3.6% this quarter. Among so-called factors commonly tracked by quantitative equity investors \u2013 characteristics driving stock returns \u2013 momentum, value and profitability are all in the green in 2024, Bloomberg indexes show.<\/p>\n The AQR Equity Market Neutral\u00a0Fund<\/a>\u00a0\u2013 a bellwether for systematic factor portfolios \u2013 has made money every month this year, taking its return to nearly 12%.<\/p>\n The momentum strategy has a history of nasty crashes, usually when a sudden risk-on shift causes underperforming companies to surge \u2014\u00a0such as<\/a>\u00a0after a Covid vaccine was announced in November 2020. While definitions of momentum can vary, the common way of ranking shares by their one-year returns paints a strategy that\u2019s going long on Big Tech and short on cyclical sectors like financials and energy \u2013 putting it at risk of a reflationary rotation.<\/p>\n Adding to naysayers\u2019 concerns are signs that the trade has become too beloved for its own good, with JPMorgan strategists warning that it\u2019s the most crowded since the global financial crisis.<\/p>\n Meanwhile, momentum trading is getting choppy amid signs the US economy is still growing at a healthy clip while Fed Chair Jerome Powell last week\u00a0stopped short<\/a>\u00a0of issuing new hawkish warnings over easing financial conditions. Meanwhile inflation, though cooling, remains a threat.<\/p>\n Any material broadening of the equity advance would be welcome news to many stock pickers given the famously lopsided nature of market gains. In recent weeks, the likes of energy and industrial sectors have risen to high positions on the leaderboard, while the outperformance of technology has narrowed.<\/p>\n \u201cWith the Fed appearing to be less concerned about inflation or looser financial conditions, reflation trades are coming back into vogue,\u201d wrote Morgan Stanley<\/a> strategists led by\u00a0Michael Wilson. \u201cThe internals of the market appear to be onto this.\u201d<\/p>\n The team accordingly upgraded energy to overweight, citing steady oil prices and attractive valuations. Meanwhile, Barclays<\/a> Plc sees money going into cyclical laggards like banks, energy and chemicals.<\/p>\n At Jefferies, strategists split the difference: Advising clients to stay on the momentum trade but focus on equities whose earnings estimates are also getting upgraded, such as Nvidia, Netflix<\/a> Inc. and The Gap<\/a> Inc.<\/p>\n Over at Wealth Enhancement Group,\u00a0Ayako Yoshioka\u00a0is pairing momentum bets with value shares \u2014 and says an easing of the rally in top performers is more likely than an outright crash.<\/p>\n \u201cWe\u2019re heading into earnings season, we could have hotter-than-expected inflation data,\u201d said the senior portfolio manager, who sits on a committee running $6.5 billion following factor-based strategies. \u201cA lot of that could potentially cool things, but I don\u2019t think it\u2019s going be that drastic of a move.\u201d<\/p>\n<\/div>\nSubscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up<\/a> for free.<\/div>\n