When momentum becomes the market

For much of the past few years, investors have typically been rewarded for owning what has already been working.

Markets have become increasingly concentrated. A relatively small number of stocks have driven a significant share of index returns, while factors such as momentum have become powerful forces in portfolio performance. In many cases, simply being exposed to markets has meant becoming increasingly exposed to those same drivers.

And when something works for a long time, it can start to feel less like a risk and more like a certainty.

That's where I think investors should be asking some important questions. Not necessarily about what has worked, but why it has worked. And perhaps more importantly, what is actually driving returns beneath the surface of client portfolios?

The hidden concentration many portfolios don't see

When we talk about concentration, most people immediately think about stock or sector weights, but concentration can also exist at a much deeper level.

You could have multiple managers. Multiple strategies. Different mandates. Yet still end up heavily exposed to the same underlying factor. Momentum is a good example.

I've always thought of momentum as a bit like a wolf in sheep's clothing. Quality investing isn't momentum. Growth investing isn't momentum. Even index investing isn't momentum by design.

But when enough capital crowds into the same ideas for long enough, many roads eventually lead to the same destination. The distinction between quality, growth and momentum can begin to blur. And that's worth paying attention to.

Success can create its own risks

One of the interesting characteristics of momentum is that it tends to reinforce itself. Strong performance attracts flows. Those flows push prices higher. Higher prices attract more capital. The cycle continues.

Until it doesn't.

The challenge is that momentum often looks safest right before it becomes most vulnerable. None of this means momentum is inherently bad. Far from it. Momentum has been one of the strongest drivers of market returns in recent years. But as investors, it's worth considering whether portfolios are benefiting from deliberate exposure to momentum, or whether exposure has simply accumulated over time as a by-product of portfolio construction.

There's an important difference between consciously making a factor allocation and discovering one only after conditions change.

Looking beyond the obvious

One of the lessons markets repeatedly teach us is that diversification is rarely about owning more things. It's about owning different return drivers.

That's becoming increasingly relevant in a world where data is widely available, and many investment approaches are drawing insights from similar information sets.

If everybody has access to the same data, the same screens and increasingly the same AI tools, where does genuine differentiation come from? That's a question we're spending a lot of time thinking about across the industry.

In my experience, some of the most persistent sources of alpha continue to come from areas that are harder to replicate. Fundamental insights, deep company research and forward-looking views remain valuable because they involve judgement, context and interpretation, not simply historical datasets.

The future rarely looks exactly like the past.

A portfolio construction conversation

For investors, I don't think the key question today is whether momentum continues to work.

The more useful question is what happens if leadership changes. How much of a portfolio's return profile is dependent on a narrow group of stocks, sectors or factors that continue to dominate? How diversified are the underlying alpha sources? What risks are investors actually being paid for taking?

These aren't necessarily warning signs. They're simply healthy portfolio construction questions. Some investors may conclude their existing exposures remain appropriate. Others may identify areas where diversification could be improved. Either outcome is valuable.

Back to investment basics

Markets will always rotate. Leadership will always change. What matters is understanding what's driving outcomes before those changes occur.

In recent years, there has been a tendency to focus on what has worked, whether that's momentum, growth, AI-related themes or benchmark leadership. But from a portfolio construction perspective, the more important question is often where the next source of alpha is likely to come from. That's why differentiated research remains so valuable.

At Fidelity, we've spent over half a century building a global fundamental research platform, not to predict the latest market trend, but to help identify opportunities and risks before they become obvious to the broader market. What makes fundamental insight powerful is that it's inherently forward-looking. It combines data, experience, company engagement and judgement in a way that purely backward-looking models cannot.

Interestingly, our own research has shown that analyst insights have historically exhibited low correlation to traditional factors such as momentum, value, growth and quality. That's important because it highlights a broader principle for investors: genuine diversification comes not only from owning different securities, but from accessing different sources of information, perspectives and return drivers.

The other part of the equation is portfolio construction. Great insights can come in many forms, but understanding how those insights interact within a portfolio is equally important. In today's market, where factor exposures can build quickly and often unintentionally, a disciplined approach to construction can help ensure returns are driven by investment insights rather than hidden concentrations.

For investors navigating an increasingly concentrated market, that may be one of the most important conversations to have with clients today. Not whether momentum will continue to work, but whether portfolios are sufficiently diversified should market leadership change.

Because momentum can be a powerful tailwind when it is working. The challenge is ensuring it's not the only engine powering the portfolio.

Managed Fund

Fidelity Global Equities Fund

Global Shares

View