The AI boom is delivering momentum investors their best returns in decades, with global momentum stocks posting their strongest performance since 1991. According to Bloomberg data, MSCI Inc.'s global momentum gauge has beaten the MSCI All Country World Index by 17 percentage points since the end of March, positioning for its strongest two-month outperformance on record. This represents a significant shift in market dynamics as investors continue to chase an expanding wave of AI winners despite broader economic uncertainties, including concerns over potentially slower growth due to the Iran war. The latest data from Bloomberg confirms this trend continues to be the dominant force in global markets, with the S&P 500 climbing to notch 14 record highs during the past month alone.
Continuous inflows into tech stocks have made momentum the dominant global style this year, as investors continue to brush aside economic risks. As reported by Bloomberg, the momentum strategy has been particularly successful in capturing the AI-driven rally, with the world's hottest stocks powering ahead despite concerns over potentially slower growth due to geopolitical tensions. The sustained inflows into the same stocks have created a concentration effect that could amplify market volatility if conditions change, with bulls suggesting the AI frenzy can continue luring money into the market's biggest winners. However, some market observers are warning that the scale of this outperformance may itself be a warning sign for future market stability. According to Goldman Sachs strategist Ben Snider, recent conversations with portfolio managers have focused on the challenge of finding investment opportunities that are not tethered to AI, noting that within the market, few sectors have avoided being caught up in the One Big Trade of AI momentum.
Market experts are expressing caution about the current momentum trend's sustainability. Hao Hong, chief investment officer at hedge fund Lotus Asset Management Ltd, predicts the momentum story will persist for another few months with significant volatility, until it reaches a climax. According to Bloomberg reports, Hong warns that if inflation expectations continue to rise, the Federal Reserve may need to make a bigger-than-expected policy move, which could stall the momentum trade. Jun Bei Liu, co-founder and lead portfolio manager at Ten Cap Investment, acknowledges seeing bubbles forming in multiple areas, noting that the AI-led basket has ignored all macro developments. She warns that slower US growth is likely to impact earnings in the next six months, which could challenge the current momentum strategy. Goldman Sachs' Snider warns that since 1980, following 11 other comparable rallies, Momentum usually extended for another month before peaking and turning lower, with sharp momentum rallies with the market near highs usually preceding soft returns during the following few months.
Despite the current rally, several factors could impact the momentum trade's longevity. As reported by Bloomberg, the longer investors crowd into the same stocks, the more exposed markets are to a sudden reversal if hot inflation causes the Federal Reserve to tighten policy or if earnings weaken. While an end to the Iran war would provide near-term sentiment boost, the concentration risk in AI stocks remains a concern for market stability. The sustained inflows into the same stocks create exposure to potential reversals if conditions change, particularly if the Federal Reserve tightens policy or earnings weaken significantly. According to Goldman Sachs analysis, AI darling Nvidia (NVDA), which accounts for 9% of the S&P 500's market cap weight, has contributed 20% of the aggregate S&P 500's year-to-date return, highlighting the significant impact of AI momentum on overall market performance.
