Riding the Momentum - Looking Beyond the Tech Giants

After a strong start to the year, equity investors are assessing whether a range of escalating risks will lead to continued volatility ahead. In this quarter’s Systematic Equity Outlook, we’ll explore macro and micro risks through a systematic lens, and how we’re positioning portfolios to harness alpha opportunities ahead.

Key points

  • The macro: Alternative data points to a continued slow pace of normalization in services inflation that could keep interest rates higher for longer. After focusing largely on growth and thematic opportunities through the outset of 2024, consecutive upside inflation surprises and rising geopolitical tensions may force equities to take emerging risks more seriously.
  • The macro in the micro: The persistence of themes like AI has contributed both to high equity index concentration and strong performance of the momentum factor—raising questions over the potential for a reversal. While the magnitude and duration of the recent rally poses risks, our analysis suggests that the positive exposure of momentum to current macroeconomic trends and the breadth of stocks driving momentum returns are keeping those risks relatively contained barring a major macro shift or deterioration in earnings.
  • The micro: Equity investors can seek to diversify market cap concentration by taking advantage of broadening performance themes—for example identifying AI beneficiaries outside of the technology sector. Today’s expanded opportunity set comes with much higher dispersion in company results than in recent decades, making effective stock selection crucial for generating alpha.