Factor Crash Risk: U.S. Momentum Factor

Should investors be concerned about the recent strong factor performance?

September 2026. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

• Concentrated momentum portfolios have recently generated extreme returns
• The factor’s volatility provides a risk warning
• Reminiscent of previous momentum crashes

INTRODUCTION

The MSCI South Korea Index generated an 80% return year-to-date, after rising by nearly 100% last year. In contrast, the annualized return from 2000 to 2024 was just 5.5%. Although the stock market often poorly reflects the economy, these returns are astonishing given South Korea’s GDP growth of about 1% last year and expectations of around 2% this year.

The strong performance can be attributed to a handful of stocks, like Samsung Electronics and SK Hynix, that are benefiting from the AI boom. However, although the technological revolution may continue, investors should be cautious of charts showing stocks or indices with exponential curves. Mean reversion is a powerful force in financial markets.

We observe similarly stellar performance among U.S. momentum stocks, which are driven by the same theme. In this research article, we explore how extreme this recent performance is, and whether factor risk can be easily measured.

PERFORMANCE OF U.S. MOMENTUM STOCKS

We take the entire universe of U.S. stocks with market capitalizations above $1 billion as the investable universe. We create a concentrated portfolio of the top 50 stocks and a more diversified portfolio comprised of the top 200 stocks. We measure momentum in line with academic research by selecting the best-performing stocks using a 12-month lookback, excluding the most recent month. Stocks are weighted by their market capitalization, and portfolios are rebalanced monthly and include 10 basis points of transaction costs.

We compute excess returns by deducting U.S. stock market returns, which highlights that both portfolios generated a zero total return between 2004 and 2023. The portfolios performed strongly before the global financial crisis in 2008 and the COVID-19 crisis in 2020, but both were followed by crashes. However, since 2024, we have seen exceptionally strong returns.

Source: Finominal

LONG-TERM PERSPECTIVE

We extend the performance analysis using data from Professor Kenneth R. French’s Data Library, which offers nearly 100 years of data. We compute the excess returns for all momentum portfolios separated into deciles, i.e., from the bottom 10% of most underperforming to the top 10% of most outperforming stocks. The data set includes highly illiquid micro and small caps and excludes transaction costs, so it likely overstates returns. The 100-year excess return indices show that only the top three deciles generated attractive excess returns, ranging from 2.4% to 6.0% per annum.

Source: Finominal

Changing the chart from log scale to linear scale highlights the top-decile momentum portfolio’s extreme returns and recent outperformance even more clearly. We also observe the crashes that followed the previous strong periods, in 2009 and 2020. Given this pattern, the current run-up may be foreshadowing another such reversal.

Source: Finominal

MEASURING FACTOR RISKS

Intuitively, high-momentum stocks should exhibit higher betas to the U.S. stock market. However, the top-decile portfolio’s average beta was only 1.1 over the last century. It did range between 0.7 and 1.8, but we observe similar ranges in the other decile portfolios. Interestingly, the P20 decile – i.e., the strongly underperforming stocks – exhibited a higher average beta of 1.2 and a slightly wider range of 0.7 to 1.9.

Source: Finominal

Plotting the top-decile portfolio’s 3-year rolling beta to the U.S. stock market shows that the current level of 1.5 is above the long-term average, but not extreme.

Source: Finominal

Next, we measure the annualized volatility of the top-decile portfolio’s excess return, as extreme volatility often signals momentum crashes (read Improving the Momentum Factor and Factor Crowding Model). And indeed, we observe that current volatility is significantly above the long-term average, specifically in the fourth quartile, and comparable to the periods before the GFC and COVID-19 crisis. Volatility was more extreme during the global recession in the 1930s, but the U.S. stock market was much less developed then.

Source: Finominal

Finally, we compute the average price-to-book ratios of the concentrated and diversified momentum portfolios, and subtract the multiple of the U.S. stock market, for the period between 2005 and 2026. Although the net multiple is currently elevated, it is not as extreme as it was around the COVID-19 period.

Source: Finominal

FURTHER THOUGHTS

Measuring the risk of the momentum factor with three metrics – betas, volatility, and valuations – only raises a concern when looking at elevated factor volatility. However, this is a well-known harbinger of momentum crashes, which, coupled with the recent exponential performance, should caution investors with exposure to this factor. A more sophisticated factor-crowding model should be used to further evaluate these risks. 

RELATED RESEARCH

Factor Crowding Model
Measuring Factor Crowding via Valuations
Risk-Managed Equity Exposure
Factor Momentum II
Factor Momentum
Impact of Lookback Period on Momentum Factor
Improving the Momentum Factor
Momentum Variations
Cap-Weighted Benchmarks: Good Momentum Bets?
Momentum in Emerging Markets
Absolute versus Relative Momentum Across Asset Classes
Thematic versus Momentum Investing
Low Vol-Momentum vs Value-Momentum Portfolios
Momentum Investing on Country Level
Sector versus Country Momentum
Value, Momentum & Carry Across Asset Classes
Absolute versus Relative Momentum Across Asset Classes
Risk versus Momentum-based Equity Allocation

ABOUT THE AUTHOR

Nicolas Rabener is the CEO & Founder of Finominal, which empowers professional investors with data, technology, and research insights to improve their investment outcomes. Previously he created Jackdaw Capital, an award-winning quantitative hedge fund. Before that Nicolas worked at GIC and Citigroup in London and New York. Nicolas holds a Master of Finance from HHL Leipzig Graduate School of Management, is a CAIA charter holder, and enjoys endurance sports (Ironman & 100km Ultramarathon).

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