(The opinions expressed here are those of the author, Helen Jewell, International CIO, Fundamental Equities, at BlackRock)

LONDON - Momentum has been the stock market story of 2025, as trades that have worked just keep on working. It would be brave to bet against momentum at this point, but there might be ways to ride the wave while avoiding a wipeout.

Momentum has outperformed as a strategy for much of the past 50 years. But this year it has been especially hot, whether it’s the seemingly unstoppable rise of anything related to artificial intelligence or even the spike in the price of gold, long considered a safe haven.

Flows into many momentum-based exchange-traded products have hit all-time highs. For example, a BlackRock AI-themed active ETF raised $7 billion in its first year, and global gold ETPs (exchange-traded products) recorded their largest monthly inflows ever in September.

On the flip side, quality-related exchange-traded products have seen outflows, and defensive areas of the market, such as consumer staples, have hit multi-decade lows versus broader markets.

What’s driving this? Firstly, and at the risk of stating the obvious, the themes behind these trades are powerful. AI will almost certainly change the world, and big tech companies are set to spend nearly half a trillion dollars this year on their AI capabilities. That’s understandably boosting chip providers like Nvidia, which recently saw its market cap eclipse $5 trillion.

Gold is also supported by potent trends. The poor state of many government balance sheets calls into question the perceived safety of government bonds and raises fears of lingering inflation.

STRUCTURAL CHANGES

Yet there are also structural changes to the market contributing here. One is the rise of retail investors. Retail investors account for about 20% of global equity market participation, up from around 15% in 2019 and 10% in 2010, according to SIFMA data. Greater retail participation is typically associated with more sentiment-driven markets. Another change is the rise of exchange-traded funds. There are now more ETFs than stocks listed in the United States, with 469 new ETFs coming to market in the first half of this year alone.

As money pours into ETFs that track major indices or dominant themes, the biggest stocks just keep getting bigger. And many ETFs explicitly attempt to capture the momentum in stock markets by giving investors exposure to a basket of the winners.

Given these thematic and structural forces, it’s hard to bet against momentum. But if history is any guide, there should be a reversal at some point. And that reversal might be sharp. For one, retail investors can be “flighty.” They typically hold stocks for only a few months on average versus a few years for institutional investors, according to data from CIBC. And in the event of a correction, ETFs that track momentum would have to rapidly rotate out of the current momentum “winners”.

FOCUS ON QUALITY

This leaves investors in a challenging position. The higher equities and other momentum darlings rise, the more investors will want to shelter their portfolios from a swift market change. Yet investors will also likely want to participate in the upside for as long as the momentum continues – because it could continue for a while.

There is no strategy that can guarantee success here, but a focus on fundamentals is likely to help.

Global “quality” companies – those that score well on measures such as profitability and earnings stability – have been on a losing streak versus the MSCI World Index since the start of 2024. That’s especially true in Europe, where valuations of quality companies are currently below the 40-year average, based on LSEG data.

This could be an opportunity for skilled stock-pickers to scoop up strong companies at reasonable prices.

While some quality companies are in industries that benefit from the AI theme, many can also be found in sectors with less direct AI exposure, including financials, healthcare and consumer discretionary.

In the U.S., the earnings gap between the “Magnificent 7” – Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla – and the rest of the S&P 500 index is forecast to narrow to just three percentage points next year, based on consensus estimates.

And there are already signs in Europe that the region’s large, quality companies, including some in the luxury space, are making a comeback after reporting promising third-quarter earnings numbers.

GOLD HAVEN

What about the gold boom? Where’s the haven if the price of the ultimate hedge comes down?

Perhaps surprisingly, gold mining companies, despite rallying over 100% this year, actually still look cheap relative to their historical averages given their rapid rise in earnings.

And mining companies are priced for a much lower gold price than we have today, as there is a large discount between consensus price estimates and both the spot price and futures curve.

If gold prices remain elevated, the miners stand to generate enormous amounts of cash. If prices fall further from record highs, the miners may see their share price dip – as we’ve seen recently – but we expect their earnings to remain robust.

MOMENTUM CRASH

Ultimately, momentum could crash, rather than stall, due to some unforeseen event that upends financial markets, especially if that “something” results in global interest rates moving higher again.

In that case, there may be few places for equity investors to hide, at least in the short term. But even in this scenario, a focus on fundamentals is likely to cushion the fall.

(The opinions expressed here are those of the author, Helen Jewell, International CIO, Fundamental Equities, at BlackRock. This column is for educational purposes only and should not be construed as investment advice.)

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(Writing by Helen Jewell; Editing by Anna Szymanski.)