Momentum has had quite a 2025. What does this mean for the end of the year?
As trend followers, the health of momentum is always of interest. After all, knowing whether momentum is going “good” or “bad” can give us insights into what indicators may (or may not be) working and can help guide our hand in our overall evaluation process. Generally speaking, the longer outstanding trends are in place, the more productive trend following can be. Furthermore, the larger the dispersion in performance between strong and weak assets the more beneficial capturing market leaders can be. Of course, these are oversimplifications to momentum markets and there are exceptions to these rules… but can help orient ourselves when we make broader investment decisions.
As points of strength and weakness have remained largely consistent over the last few years, it comes as no surprise that momentum focused strategies have performed relatively well. Zooming in to 2025, factor proxy MTUM has advanced notably, up roughly 23% so far). Outperforming the broad market SPX by roughly 10%, this marks the widest spread in favor of MTUM through three quarters of the year since 2020 and the second consecutive year of excess returns through Q3. The astute analyst quickly wonders: “What happens next?” Going back to 1993 MTUM has continued to outperform the broad market after doing so through the first three quarters just over 50% of the time (12 of 23 times). While this ultimately equates just nothing much more than a coin flip, it is technically on the “right” side of 50% and suggests that momentum’s strength has a fair shot at continuing in Q4.
Building on this idea is the strong “average” quarter for momentum. It is no secret that markets typically end out the year on a positive note (seasonally strong part of the year, Santa Claus Rally, etc.). The same is true for momentum, with average returns for MTUM sitting just under 5.5% for Q4 based on data back to 1993. This is the best of the year and bests 2nd place Q2 by roughly 75 basis points. Q4 was also positive, by any magnitude, roughly 75% of the time. Of course, there is much more in play than simple averages when considering what might happen over the final three months of 2025, but knowing what could be in store is certainly a good start. Going forward, it will be of utmost importance to monitor current points of strength/weakness to see how things develop in Q4 and the start of 2026.
