Navigating a momentum-driven market
Global equity markets are currently being driven by a powerful momentum cycle, reshaping the opportunity set across our funds. The AI capex boom has seen beneficiaries such as industrials and semiconductors post exceptional returns. This wave of momentum is rewarding recent winners while punishing almost everything else, and a surprising amount of the buying appears to be mechanical rather than deliberate. In this piece, we look at why momentum has become so extreme, how we have adjusted our Global Equity portfolio in response, and where the market dispersion has created opportunity.
The dominance of momentum
The standout feature of today’s market is the dominance of the momentum factor. It has outperformed by a wide margin, while growth, quality and value have all lagged. Investors continue to crowd into the market’s winners, while capital flows away from those perceived to be on the wrong side of the trade.
Comparing the three-year rolling returns of the S&P Momentum Index with those of the S&P 500, the current level of outperformance is as extreme as it was during the dot-com bubble.
Graph 1: S&P Momentum Index vs S&P 500 (three-year rolling returns)
Source: Fairtree, Bloomberg, as at July 2026.
- The rapid growth of leveraged ETFs
- Hedge fund positioning
1. The rapid growth of leveraged ETFs
Assets in leveraged ETFs have climbed above US$200b, roughly three times their 2022 level, as retail demand for leveraged investment products has surged. At the same time, options trading has become increasingly accessible and inexpensive. This has led to same-day expiry options trading accounting for 48% of all options traded, roughly doubling its share over the twelve months. The result is a market where leverage is amplifying existing trends and volatility.
When investors buy these products, the banks on the other side of the trade must purchase the underlying shares to maintain their hedges, creating additional buying pressure. Crucially, these flows are heavily concentrated in technology, specifically semiconductors, while software attracts relatively little of the same demand. As a result, mechanical buying continues to flow into one corner of the market while largely bypassing the one right beside it.
Graph 2: total leveraged ETF assets under management (AUM)
Source: Citadel Securities, GMI, as of June 2026.
2. Hedge fund positioning
Large multi-strategy hedge funds now account for a significant share of daily trading activity. Their tightly managed risk frameworks often reinforce prevailing market trends, leading to record positioning in semiconductors on both a net and gross basis. Meanwhile, exposure to software has fallen to an all-time low, reflecting concerns that software businesses may be among those most disrupted by AI.
Semiconductor positioning has risen to the 95th percentile of its historical range, while software sits at just the 2nd percentile. The AI build-out has created highly concentrated pockets of enthusiasm at both a sector and stock level. Together with the rise in leveraged investing, this helps explain why a small group of perceived AI beneficiaries continues to dominate market returns while other parts of the market are left behind.
Graph 3: Net hedge fund positioning: software versus semiconductors
Source: Morgan Stanley Prime Brokerage, as at January 2026.
How we are positioned
We run a multi-factor approach and are style-agnostic, allocating capital across quality, value, growth and momentum depending on where we see the best opportunities. Historically, this has resulted in the portfolio being overweight in quality, value and growth in both absolute and relative terms, while remaining neutral on momentum on an absolute basis and underweight on a relative basis. Since we focus on cash flows and maintain a disciplined valuation framework, a market this dominated by momentum does not naturally favour our style.
This is where active management matters. Investing through periods like this is not about abandoning your philosophy but adapting to the environment. We slightly increased our momentum exposure earlier this year. In practice, this means holding onto our winners for longer and being more selective when adding to names that have lagged. It does not mean chasing winners and abandoning high-quality and growth companies that have underperformed. While we remain fundamentally driven investors, we have always tried to adjust the portfolio to reflect prevailing market conditions. This approach has helped us deliver consistent returns.
Narrow market breadth
Source: Jefferies, FactSet, as at March 2026.
Elevated valuation dispersion
Narrow breadth has been accompanied by extreme valuation dispersion. Valuation dispersion is the gap between the valuations investors are willing to assign to the market’s most favoured stocks and those assigned to its least favoured. That gap now stands among the widest on record. A small number of stocks are priced as though nothing can go wrong, while a large number are valued as though they have little future.
The same forces driving narrow breadth are at work here. Perceived AI winners continue to rerate higher, while perceived losers become progressively cheaper. There is always a risk in buying the laggards too early. However, the opportunity is equally clear. Valuation dispersion at these levels has historically created favourable environments for active managers, as gaps of this magnitude have tended to narrow over time.
Graph 5: Valuation dispersion between the blended forward P/E ratios of MSCI World stocks in the 20th and 80th percentiles
Dislocation between semiconductors and software
The clearest example of this dispersion is the gap that has opened between semiconductors and software. The Semiconductor GICS 2 Index outperformed the Software & Services Index by approximately 290% from the start of 2024 to the end of June 2026. Over the long run, software has outperformed semiconductors, as a greater share of value is typically captured the closer you are to the end consumer. The two sectors are normally highly correlated, but that relationship has broken down as capital has rotated towards the hardware businesses perceived to be the primary beneficiaries of AI. This also happened around the dot-com bubble when semiconductors outperformed software by 120% over the first eight months of 2000.
Graph 6: S&P 500 Semiconductors & Semiconductor Equipment vs S&P 500 Software & Services: rolling 12-month sector returns (USD)
Source: Fairtree, Bloomberg, as at July 2026.
This derating reflects a broader market debate, sometimes referred to as the “AI scare trade”, about whether AI will erode the value of established software businesses as customers increasingly build their own tools. In our view, this overlooks the real sources of value creation in enterprise software.
Enterprise software is deeply embedded in customer workflows and must be integrated, secure, reliable and continuously maintained. While a small business may be able to build a basic internal tool, a large enterprise operating with decades of embedded data, supplier integrations and institutional knowledge faces a very different reality. Replacing a core system is often costly and risky, and can take years to execute successfully.
The question is not whether AI can write code, but whether it can replace decades of accumulated expertise embedded within enterprise software and infrastructure. Used effectively, AI may, in fact, strengthen many software businesses by accelerating product development, enhancing functionality and improving customer outcomes, ultimately supporting retention rather than threatening it.
Yet the market is telling a very different story. While software share prices have derated sharply, the underlying fundamentals have remained resilient. Earnings have continued to grow even as valuations have compressed significantly, creating an increasingly wide disconnect between share prices and business performance.
Graph 7: Software companies’ price-to-earnings multiples: five-year average vs 12-month forward P/E
Source: Fairtree, Bloomberg, as at July 2026.
Looking ahead
The current environment remains challenging for active investors. Momentum continues to dominate, market leadership is unusually narrow, and valuation gaps have widened significantly. Yet it is often these periods of dislocation that create the most compelling opportunities.
History suggests that extremes rarely persist indefinitely. While the timing of any shift is impossible to predict, periods of sharp rotation and valuation compression have historically created fertile ground for patient, fundamentally driven investors.
We remain anchored to our core principles of value, sustainable future cash flow growth and quality. As a result, we believe the dispersion and volatility we see today are creating opportunities that should benefit long-term investors.
Author
Karena joined Fairtree in 2024 as a Global Investment Specialist in the Investment team. She began her investment career in 2019 as an Investment Professional at Investec Asset Management, followed by a role as an equity analyst at Denker Capital. In 2021, she joined PSG Asset Management as an equity analyst, gaining further experience in equity markets and financial modelling. Karena holds a Bachelor of Science degree in Mathematical Sciences from the University of Johannesburg.
FAIRTREE INSIGHTS
You may also be interested in
Explore more commentaries from our thought leaders, offering in-depth analysis, market trends and expert analysis.
Global Equity Spotlight Episode 15
In Episode 15 of our Global Equity Spotlight series, Global Investment Specialist Karena Naidu is joined by Equity Portfolio Managers Cornelius Zeeman and Jacques Haasbroek to explore the factors driving these trends, how the changing composition of the MSCI Emerging Markets Index has reshaped the emerging market landscape, and the implications for investors.
A structural shift in emerging markets has created a compelling long-term opportunity
Emerging markets (EM) continue to present some of the most dynamic and attractive investment opportunities in global equities.
Disclaimer
Fairtree Asset Management (Pty) Ltd, Registration Number: 2004/033269/07, is an authorised Financial Services Provider (FSP25917) under the Financial Advisory and Intermediary Services Act (No.37 of 2002), to act in the capacity as investment manager. This information is not advice, as defined in the Financial Advisory and Intermediary Services Act (N0.37 of 2002).
Information and content
The information in this publication is provided by Fairtree for general information purposes only. It is not financial, tax, legal, investment or other professional advice, and should not be relied upon as the sole basis for any investment decision. Investors should seek advice from a qualified financial adviser regarding their individual circumstances. While reasonable care has been taken to ensure the accuracy of the information, Fairtree makes no representations or warranties and accepts no liability for any loss, damage, cost or expense arising from its use. Nothing herein constitutes an offer, solicitation, or recommendation to invest.
Management company
Prescient Management Company (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002).
Performance
Collective Investment Schemes in Securities (CIS) should be considered medium- to long-term investments. The value of a CIS may go up as well as down, and past performance is not necessarily a guide to future performance. CISs are traded at the ruling price and may engage in scrip lending and borrowing. A schedule of fees, charges, and maximum commissions is available on request from the Manager. A CIS may be closed to new investors to allow it to be managed more efficiently in accordance with its mandate.
Performance has been calculated using net NAV-to-NAV numbers, with income reinvested. The performance shown for each period reflects the return for investors fully invested for that period. Individual investor returns may differ due to initial fees, the actual investment date, the timing of reinvestments, and dividend withholding tax. Full performance calculations are available from the Manager on request. There is no guarantee of capital or returns in a portfolio. Annualised performance represents the average return per year over the period, rescaled to a one-year period. Actual annual figures and the highest and lowest one-year returns since inception are available on request. NAV (Net Asset Value) represents the assets of the Fund less its liabilities.
Fees
Permissible deductions may include management fees, brokerage, securities transfer tax, auditor’s fees, bank charges, and trustee fees. A schedule of fees, charges, and maximum commissions is available on request from Fairtree. For more information on annual management fees, please refer to the fund’s factsheet or the Fairtree website.
For any additional information, such as fund prices, fees, brochures, minimum disclosure documents and application forms, please go to www.fairtree.com.
About you…
By proceeding, I confirm that:
- To the best of my knowledge, and after making all necessary enquiries, I am permitted under the laws of my country of residence to access this site and the information it contains.
- I have read, understood, and agree to be bound by the Terms and Conditions and Privacy Policy.
Important notice:
Please beware of fraudulent WhatsApp groups and social media accounts pretending to be affiliated with Fairtree or Fairtree employees.
If you do not meet these requirements, or are unsure whether you do, please click “Decline” and do not continue.