After, two strong years of S&P 500 performance averaging 25.5%, 2025 has taken a different turn. As of the middle of the trading day on April 4th, the S&P 500 is down 13% year-to-date, with market volatility, as measured by the VIX, reaching levels not seen since the onset of the COVID-19 pandemic, over five years ago.
An article in The Wall Street Journal dated March 31, 2025 titled, “This Investing Trend is your Friend- Until It Isn’t” highlighted a key theme. The article discussed the strong performance of S&P 500 Momentum1stocks relative to S&P 500 Value2 stocks over the past three years, with Momentum showing significant outperformance. It points out that Momentum stocks have performed especially well during periods of falling growth and inflation. However, the article suggests that this could change if we are entering a phase of falling growth combined with rising inflation- a scenario we may be facing now. Since the February 19th 2025 S&P 500 peak, through April 3rd, the S&P 500 Value Index is down 7.3% while the S&P 500 Momentum Index has declined 13.9% (Source: FactSet)
In a recent Villanova University MSF Portfolio Theory & Application class, I asked my students to categorize each stock owned in the student managed fund as either closer to momentum or value. By reviewing technical, earnings, and valuation factors, the students concluded that the portfolio maintained a balance of both momentum and value stocks. We discussed how stocks often become momentum stocks due to strong fundamentals, including above average earnings growth, consistent performance and favorable industry dynamics. However, the issue arises when the stock reaches peak valuation, and uncertainty sets in, leading to reduced earnings visibility. At this point, these more expensive and crowded stocks can quickly become underperformers.
The potential impact of increased tariffs and global trade uncertainty has on the global economy remains a topic of broad debate. However, the current market environment serves as a reminder of the importance of diversification in a portfolio. It is essential to understand the characteristics of the stocks within a portfolio and consider how that portfolio might behave in different market and economic conditions. One should also be mindful of any concentrations of any particular style or stock, that could lead to deviations from expected performance in specific market environments.
This is also an ideal time to revisit a client’s asset allocation- particularly in light of ongoing financial planning.
1Momentum effect is the tendency of poorly performing stocks and well-performing stocks in one-period to continue that abnormal performance in following periods (Essentials of Investments, Bodie, Kane & Marcus, 2024 release)
2Value stocks are defined by low P/E ratio, high book-to-market ratio or depressed prices relative to historic levels (can also be high dividend paying stocks (Essentials of Investments, Bodie, Kane & Marcus, 2024 release)
