May 4, 2025
US equities are making their first serious attempt at a bullish reversal since prices began their tumble in late February. Global trade concerns have pushed their way to the forefront of investor consciousness, and with the Trump administration signaling reconciliation with most major trade partners in April, equity investors have switched to accumulation mode in the near-term and we are looking for signs of new leadership as well as re-emergence of the old.
Our bull market equity trend of 2023-2024 is not so antique as to escape our memory. It was led by rabid enthusiasm for AI value chain exposure and enormous earnings Growth for the Mag7 Mega Cap. Growth giants. Peripheral leading industries included Homebuilders, investment banks and asset managers, nuclear power exposed Utilities and Construction and Engineering related concerns.
In general, when equities have trended higher, Growth has been leading the way. When we look at the performance of various Growth benchmarks over the past 6-months we see ex-US Growth has benefited.
However, as we have pointed out in the past, Ex-US Growth basically just means Ex-US. The chart below is ex-US Growth and Value ETFs for Developed and Emerging Markets. What is striking is the lack of differentiation in performance between the two styles across regions. Given how the US vs. ex-US dynamic has aligned around the trade war dynamic, we are expecting continued reflation of US shares vs. ex-US as long as news flow remains supportive of trade reconciliation. Because of this, we are more interested in the emergence of US MidCap Growth outperformance.
Mag7 and AI themes kept a tailwind behind mega cap. operating co.’s. But now that Chinese competition has emerged and the trade war shrinks the pie, the playing field levels. Smaller sources of earnings Growth will come into focus. We think increased scrutiny should be paid to Mid Cap. Growth stocks. Our momentum score helps us identify longer-term outperformers that maintain positive gains through turbulence.
Among the highest scoring momentum names in the Mid Cap. Growth Index are PLTR, APP, MSTR, DUOL, BROS, UI and HWM. Technology and Discretionary sectors currently contain the greatest number of stocks with top quintile momentum scores based on our methodology.
The strongest trends often persist through top-line macro level turbulence. AI and Mag7 sucked all the flows away from other areas of the market for a long period of time. If global trade realignment changes the big picture, we could be set up for a new emerging leadership profile. Companies, industries and sectors that exhibit positive momentum through turbulence are a good bet to continue outperformance. Our early research on intermediate-term (3-6 month) momentum shows that the highest scores also equate to longer-term positive forward returns over 6- and 12-month forward periods. If we think about that through the lens of common sense, it means that while a trend is in force the best momentum names are likely to accrue superior returns. If a trend completely changes, the last cycle of highest momentum scores are the ones that will prove false. So we also want our readers to pay attention to the underlying trends.
Now that the S&P 500 is showing tangible signs of bullish reversal, we should be looking at stocks with strong intermediate-term momentum to help us identify leadership themes.
Patrick Torbert, Editor & Chief Strategist, ETFSector.com
Data sourced from FactSet Research Systems Inc.
