Where to find value in a market obsessed with momentum

In an environment where momentum is a dominant force across equity markets, driven by a narrow set of winners and a powerful “hope trade”, the question that begs to be asked is - what’s being left behind? And what does that mean for value investors heading into 2026?

In a recent webinar hosted by Pzena Investment Management, John Goetz, co-Chief Investment Officer, highlighted the significant role that momentum has played in shaping market returns.

“Momentum stocks have outperformed by roughly 20%,” he noted, emphasising that this trend is not just a short-lived phenomenon but has led returns for the second consecutive year. 

Goetz pointed out that while momentum cycles often drive dispersion, creating a clear divide between the "haves" and "have-nots", this cycle has some unique characteristics compared to previous ones. 

Dispersion and its implications

Portfolio manager Daniel Babkes elaborated on the nuances of the current momentum cycle, particularly in the U.S., where speculative behaviour has become more pronounced. He noted “meme stocks” and unprofitable businesses showing outrageous outperformance, which signals a shift towards more speculative investments.

By the same token, Babkes highlighted that the key takeaway for investors is the dispersion within the market. "The loved stocks are really loved, the unloved stocks are really unloved," he explained. 

This divergence is critical for value investors, as it indicates potential opportunities in sectors that are currently undervalued.

“We’re seeing some real signs of growth from industries that are benefiting from AI hype,” he added, but also warned that many sectors are facing headwinds due to overcapacity and technological disruptions. 

The opportunity set, therefore, is “lumpy and attractive,” suggesting that astute investors should be able to find compelling investment cases amidst the broader market noise.

Looking ahead

On the landscape heading into 2026, Goetz advised investors to remain agile. “We never really know when the momentum phase ends,” he cautioned, but emphasised that it is crucial for value investors to transition their portfolios from what has worked, to what is inexpensive.

The global economic backdrop is fraught with challenges, including trade tensions, regulatory shifts in the healthcare sector, and geopolitical issues impacting markets like China and Europe. 

“We need to be fleet of foot to examine new crises and the companies caught in them,” Goetz said.

Babkes further emphasised this point by discussing the structural changes within value investing. "The idea that value investing won’t work the same way it has historically doesn’t hold," he stated firmly, arguing that the fundamentals of value investing - capitalising on fear in the market - remain intact.

"That could be either real fear, like the company's earnings have gone down, or fear that they will go down in the future because of some change coming. We're trying to take advantage of that and underpay structurally for a long-term stream of cash flows.

So you are structurally underpaying for cash flows that actually come through mathematically, you have to generate a reasonable return - and that's not something that can structurally change."

The case for specific stocks

To illustrate the current investment landscape, Goetz shared a concrete example of air-conditioning giant, Daikin Industries (TYO: 6367). 

He explained that while the company has faced temporary challenges, including a weakened housing market in China and regulatory changes in the U.S., it remains well-positioned for the future. “We expect the earnings of this company to double over the next five years,” he said.

Similarly, Babkes discussed Baxter International (NYSE: BAX), a healthcare company that provides medical supplies and equipment to hospitals, which has seen its stock price decline due to supply chain disruptions and margin pressure. 

He noted that despite these setbacks, Baxter remains a fundamentally strong company with significant growth potential. “The expected return from here is absolutely fantastic,” he concluded.

The concentration problem investors shouldn’t ignore

In a landscape marked by increasing concentration risk in global equities, one of the warnings was reserved for passive investors.

“You think you’re maybe buying a diversified basket… and it’s not,” said Babkes. He noted that concentration in a small number of leaders is at “multi-year records”, and global indices are increasingly pulled along by the same US mega-cap theme.

“By being passive, you’re not getting diversification…you’re kind of getting concentration to the thing that everybody’s already excited about and paying up for.”

This trend is mirrored globally, and “history says that's not a great place to be,” Babke warns, as these popular stocks often underperform when overly hyped.

Embracing the future

While concentration risk is a concern, Goetz says investors should remain vigilant yet open to exploring undervalued assets in this evolving market environment.

“Historically, extreme momentum periods often create attractive long-term setups for value,” Goetz summarised, reflecting on current market conditions.

“I think that with enough resource, you can go to work on what is likely in terms of the future range of outcomes….We don't know the future. What we know is that a very dark version is priced in, and the whole version isn't even there."