Finding value when momentum runs hot

Momentum has become one of the defining forces in global equity markets. For many investors the temptation is to assume the winners will simply keep winning. But Pzena Investment Management’s John Goetz and Dan Babkes argue the more important story sits beneath the headline rally. In their telling, this is a market increasingly shaped by hope, speculation and sharp over-reactions. The market is not offering a calm assessment of long-term business fundamentals. For value investors, that does not signal retreat; it signals opportunity.

That framing matters for advisers trying to make sense of a market in which benchmark strength can mask a much more uneven reality underneath. On the surface, momentum has dominated returns, especially in parts of the US market tied to AI enthusiasm and large-cap growth. Yet Pzena’s case is that the real investment implications lie not just in the obvious winners. Investors should observe the widening gap between what the market is rewarding and what businesses are actually worth over time.

Hope is driving markets harder than fundamentals

Goetz, Pzena’s co-chief investment officer and portfolio manager, is clear that the current backdrop shares many of the classic features of past momentum cycles. The most obvious is psychological. “Momentum cycles have lots of hope in them,” he says. It is a concise description of a market phase. In that phase, optimism itself becomes a driver of returns; it often pushes price moves far beyond what a sober reading of fundamentals might justify.

He puts it more bluntly elsewhere. Investors can usually tell when momentum has taken hold because the same stocks dominate every conversation. “When professional investors and the taxi driver are talking about the same stocks, you know those stocks have momentum,” he says. For advisers, the point is not merely anecdotal. It is a reminder that narrative saturation often arrives alongside stretched expectations. Crowded enthusiasm can become a poor substitute for disciplined analysis.

Goetz also argues that the mechanics of these phases have become increasingly exaggerated. Companies that beat earnings estimates by a modest amount are rewarded disproportionately. Those that disappoint are punished just as aggressively. In other words, markets are not simply discriminating between good and bad businesses. They are amplifying every signal. In doing so they are creating bigger dislocations in valuation.

AI enthusiasm is amplifying old momentum patterns

Where this cycle looks different, in Pzena’s view, is in the degree to which AI has accelerated and intensified those familiar momentum dynamics. Goetz says the broad pattern may be recognisable, but the scale of the moves is unusual. “This degree of craziness in stock price moves is even crazier than maybe some of the prior momentum cycles,” he says.

That matters because AI has not just created a new growth narrative. It has also altered the speed with which the market can change its mind. Businesses can move quickly from being seen as strategically irrelevant to being recast as beneficiaries of the next major investment wave. As sentiment shifts, valuations can follow at a pace that owes as much to rhetoric and positioning as to any measured reassessment of long-term earnings power.

At the same time, Goetz makes the useful observation that leadership in a momentum market is never as fixed as it first appears. While global technology names remain central to the current hope trade, sectors and companies in favour can change over time. Outside the United States, for example, financials have participated more meaningfully in the momentum trade than many investors might assume. That complicates the simplistic idea that value has been entirely shut out of the current rally. It has not. Rather, the leadership pattern is evolving. The opportunity set is broadening in ways that matter for active investors.

Dispersion is reopening the opportunity set for value

If Goetz provides the historical frame, Babkes sharpens the investment case. The portfolio manager argues that the defining feature of the present market is not simply momentum, but dispersion. “If I was going to say why this matters, I’d really bring it down to one word, and that’s dispersion,” he says.

That word is doing a lot of work. Babkes’ point is that strong index performance can create the illusion of broad economic health and coordinated earnings strength across industries, when the reality is far more fragmented. Some businesses are being rewarded for positive operating momentum. Others are being lifted by little more than a compelling story. Meanwhile, companies dealing with cyclical or temporary problems are often being sold-down far more aggressively than the underlying fundamentals warrant.

This is where the market starts to look especially attractive to fundamental value managers. Babkes argues that investors are seeing “real tangible signs of speculative behaviour” as the cycle matures. These include the return of ‘meme-stock’-style activity, the outperformance of unprofitable companies, and enthusiasm for heavily shorted names. That kind of behaviour, he suggests, belongs more to a “speculative hope cycle” than to a market grounded in careful fundamental assessment.

For advisers, this is a crucial distinction. A momentum-led market can look coherent from a distance. Up close, it may be deeply inconsistent, even irrational. Some parts of the market are enjoying earnings resilience and structural growth. Others are simply catching a wave of enthusiasm. Conversely, some weaker areas are being marked down as if near-term disruption were permanent. That is precisely the sort of environment in which active stock selection can begin to add real value.

Babkes argues that several forces are driving this fragmentation, including uncertainty around trade policy, geopolitical instability and lingering post-pandemic supply imbalances. The reference to COVID may seem dated, but his point is that a number of industries are still working-through distortions created years ago. Markets, in his view, are responding to those pressures with excessive speed and insufficient nuance.

A target-rich environment for patient investors

That over-reaction is the heart of the value case. “That’s creating some really chunky investment opportunities when we can look past the near-term choppiness and look at the longer-term fundamentals,” Babkes says. It is the strongest line in the discussion because it captures the tension at the centre of the current market. Short-term volatility and narrative-driven pricing sit on one side; longer-term business value sits on the other.

He goes further, describing the present backdrop as “a pretty target-rich environment” across a broad range of industries. That is a notable claim in a market often portrayed as narrow and top-heavy. Pzena’s view is that beneath the concentration of index leadership, there is considerable scope for bottom-up investors to identify businesses whose share prices have been overly penalised by cyclical weakness, operational disruption or temporary strategic uncertainty.

This has practical relevance for advisers thinking about manager selection and portfolio construction. The temptation in a strong momentum market is to assume that any deviation from the winners is simply a drag. But if Pzena is right, the more interesting question is whether current prices are embedding unrealistic optimism in one part of the market and excessive pessimism in another. On that view, discipline matters more than chasing the latest theme.

Ultimately, the message for advisers is not that the momentum trade is about to end, nor that AI enthusiasm will suddenly evaporate. It is that markets dominated by hope can create just as many opportunities in the stocks left behind as in the names everyone already owns. Beneath the strength of the indices, dispersion is widening, speculation is becoming more visible and over-reaction is creating mispricing across sectors and regions.

For patient investors, that is often where the real work begins.

Laurence Parker-Brown

Laurence Parker-Brown is head of content at The Inside Network and managing editor of The Inside Adviser and Investor Strategy News.