European Equity Strategy: The power of momentum

Research evidence excerpt

European Equity Strategy: The power of momentum

the sectors with

the highest concentration among low-momentum stocks include staples, software and luxury goods.

Cross-sector dispersion is starting to look extreme: the strong one-way traffic on the momentum front has

created meaningful dislocations in pricing, with the trades associated with the winning themes now priced for a highly

optimistic profitability, margin and macro environment, while the sectors attached to losing themes are trading at

meaningful discounts. It has also led cross-sector dispersion in Europe to rise to levels only seen twice over the past 20

years (during the GFC and Covid). That dispersion, notably, cuts across the cyclical / defensive divide: for while the

robust macro backdrop and the tailwind from the AI investment boom have lifted cyclicals versus defensives overall to a

30-year high, some winners have nonetheless been among the defensives (utilities as an AI power-demand beneficiary),

while a number of cyclicals have been hit (luxury, autos, chemicals).

How to position in a momentum-driven market? A key question for clients is whether to position for further

outperformance by the recent winners despite increasingly stretched pricing and earnings expectations – or whether to

start rotating into some of the left-behind losers whose valuations embed far less demanding expectations. How would

mean reversion start? Possible catalysts for a momentum shift include: (a) disappointment in the AI capex roll-out story,

potentially because of concerns about monetization (see: European Equity Strategy, Jun 12); (b) a widening in risk premia

that would challenge some of the stretched cyclical momentum winners and would support the beaten-up defensives;