The Momentum Anomaly

  • 01 July 2014 (10 min read)

Earnings Growth as the Fundamental Driver of the Momentum Anomaly

The Theory

The connection between past stock market returns and subsequent performance is among the more analyzed stock market anomalies. In numerous studies, the trend in stock prices has been found to have a significant correlation with future stock prices, albeit with differing signs over differing time horizons. Rosenberg Equities research has focused on the connection between medium-term price momentum1 and measures of trailing and expected earnings. We suggest a theoretical linkage and find empirical evidence for a connection between trailing relative performance and the evolution of company earnings. In short, we show that medium-term trailing price performance is a robust predictor of forward earnings growth at the individual company level. Importantly, we believe that momentum’s positive and very stable correlation with year-ahead change in earnings yield aligns it with the fundamental driver of equity returns. It is this relationship that is at the core of the momentum anomaly.

The “momentum anomaly” typically refers to patterns in which the best performing stocks over the prior 3 to 12 months continue to outperform weaker performing stocks over the next 12 months2 . We, and many others, have observed a return premium to the momentum anomaly.

  • TWVkaXVtLXRlcm0gbW9tZW50dW0gY2FuIGJlIHRob3VnaHQgb2YgYXMgcG9zaXRpdmUgcmVsYXRpdmUgc3RyZW5ndGggb3ZlciBhIHllYXItbG9uZyBwZXJpb2QuIEl0IGlzIGRpc3RpbmN0IGZyb20gc2hvcnQgdGVybSBtb21lbnR1bSB0cmVuZHMgdGhhdCBjYW4gYmUgZGFpbHkgb3IgZXZlbiBpbnRyYS1kYXkgaW4gZHVyYXRpb24u
  • Tm90ZSB0aGF0IOKAnHByaWNlIG1vbWVudHVt4oCdIGFuZCDigJxyZWxhdGl2ZSBzdHJlbmd0aOKAnSBhcmUgb2Z0ZW4gdXNlZCBpbnRlcmNoYW5nZWFibHkuIEJvdGggdGVybXMgY2FwdHVyZSB0aGUgY29uY2VwdCBvZiBhIHN0b2NrIChvciBncm91cCBvZiBzdG9ja3MpIGJlaW5nIOKAnG9uIGEgcm9sbOKAnSBjb21wYXJlZCB0byBwZWVycy4=
Investment Research
Download report (346.67 KB)

Related Articles

Equities

MSCI World Climate Paris Aligned Index (PAB): A world of opportunity with a decarbonisation twist

  • by AXA Investment Managers
  • 09 July 2024 (3 min read)
Equities

Emeric Oziel shares an update on the European equities market

  • by Emeric Oziel
  • 03 July 2024 (5 min read)
Equities

Biodiversity for growth: investing in transition winners is only natural

  • by Anna Väänänen
  • 03 July 2024 (5 min read)

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document. Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

    Back to top