Wall Street’s red-hot momentum trade is still winning, as strategy delivers best 2-month gain on record

Wall Street’s hottest trade lately has been a relatively simple one: Just buy shares of stocks that have already been winning.

The S&P 500 Momentum Index, which tracks stocks in the S&P 500 SPX with strong recent relative performance, has gained 31.7% over the past two months, recording its best two-month performance on record, according to Dow Jones Market Data. The index rose 19.2% in April and was up another 12.5% in May.

Wall Street’s red-hot momentum trade is still winning, as strategy delivers best 2-month gain on record

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The chart below shows the S&P 500 Momentum Index’s two-month performance, with data dating back to 1994, to highlight its historic recent surge.

Momentum investing is built around buying stocks that have already been rising, on the view that strong trends in the market typically persist for a time. That has worked especially well in a market where investors have kept rewarding companies tied to artificial intelligence, from chip makers to businesses seen as beneficiaries of the broader AI buildout.

The risk is that momentum works best when leadership stays intact. As the market’s rally starts to broaden beyond the same AI-linked winners, it raises the chance that the stocks that worked best in the past few months may not lead the next leg higher, analysts say. Researchers who have tried to isolate the performance of momentum stocks have found reliable evidence that the strategy tends to outperform over time. However, it is also prone to painful pullbacks.