Global Momentum Stocks Post Record-Breaking Rally Amid AI-Fueled Market Surge

Momentum Investors Reap Best Returns in Decades Amid AI Frenzy

The global market is experiencing its strongest two-month outperformance on record, with the MSCI Inc.'s global momentum gauge beating the MSCI All Country World Index by 17 percentage points since the end of March. According to data compiled by Bloomberg, this outperformance is the largest since 1991, a period when the global momentum gauge was first tracked.

The AI boom is driving investors to the market's biggest winners, with tech stocks receiving continuous inflows and making momentum this year's dominant global style. Despite concerns over potentially slower growth due to the ongoing Iran war, investors are brushing aside economic risks to chase the expanding wave of AI winners.

However, some experts caution that the scale of the outperformance is a warning sign, as the longer investors crowd into the same stocks, the more exposed markets are to a sudden reversal. This could occur if hot inflation causes the Federal Reserve to tighten policy or if earnings weaken. In fact, the longer-term implications of this trend are being closely watched by investors.

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Experts such as Hao Hong, chief investment officer at hedge fund Lotus Asset Management Ltd, believe that the momentum story will persist for another few months, but with significant volatility in between. Hong also warned that if inflation expectations continue to run higher, the Fed may make a bigger-than-expected move, stalling the momentum trade.

Jun Bei Liu, co-founder and lead portfolio manager at hedge fund Ten Cap Investment, shares similar concerns. While an end to the war would further boost sentiment in the short term, slower US growth is likely to impact earnings in the next six months, she added. Liu also noted that an AI-led basket has ignored all macro development, which could be a sign of bubbles forming in the market.