As Sentiment Shifts, Fundamental Momentum Will Outperform Price Momentum

Market Sentiment Shift - Recent weeks have seen a significant change in market sentiment, with high-flying momentum stocks experiencing substantial pullbacks, exemplified by the Invesco tech ETF (QQQ) dropping from $630 to under $600 [1] - The sell-off has been particularly pronounced in individual names such as Bitcoin (BTC-USD) and Palantir (PLTR) [4] Types of Momentum - Momentum investments can be categorized into two types: fundamental momentum and price momentum [6] - Fundamental momentum is based on high earnings multiples justified by expected future growth, while price momentum relies on the stock's recent upward price movement, regardless of valuation [7][8] Impact of Market Sentiment - Fundamental momentum is less affected by market sentiment in the long run, as it is based on the company's growth potential, while price momentum is heavily influenced by market perceptions [11][12] - A shift in sentiment can lead to significant impacts on price momentum investors, who may exit positions if the stock's price declines without a strong fundamental basis [13] Current Market Concerns - The recent price movements suggest a potential shift in sentiment, with concerns about the financing of AI-related capital expenditures and the sustainability of returns on investment [14][15] - The market is reassessing valuations as uncertainty grows regarding the outcomes of AI investments, leading to a pullback in stock prices [16] Differentiating Investments - Investors need to differentiate between companies that will succeed in the long term and those that are merely benefiting from hype, as seen in past market bubbles [18][19] - Fundamental momentum investors are better positioned to identify strong companies amidst market corrections, as their exit strategy is based on fundamental impairments rather than price drops [20] Conclusion - In a soaring market, both fundamental and price momentum can thrive, but a reversal in sentiment may disproportionately affect price momentum investors, emphasizing the need for a solid fundamental justification for investments [21]