December 26 Momentum Picks: A Macro Strategist's Framework for 2026

The central investor question is no longer whether momentum works, but whether its torrid 2024-2025 run is sustainable or a sign of froth. The data presents a classic momentum crossroads: powerful statistical tailwinds are met by froth concerns that create a higher bar for future returns.

The momentum factor's current valuation is a clear indicator of high expectations. Its price-to-earnings (P/E) of 28 trades at a significant premium, 33% above its historical average. This premium reflects the market's confidence in the durable growth and strong balance sheets of its holdings. However, it also sets a demanding hurdle. For momentum to continue delivering, its high-flying stocks must consistently meet or exceed these elevated growth forecasts, leaving little room for disappointment.

This creates a tension with the factor's extreme recent performance. Momentum's rolling 12-month excess return to the S&P 500 is now in the 96th percentile over the past 50 years. This level of outperformance has only been surpassed once in that span-the dot-com bubble. While the fundamental quality of today's momentum stocks is stronger than in 2000, the sheer magnitude of the current excess return is a classic warning sign. It suggests the factor may be reaching a peak in its cycle, where the risk of a sharp reversal increases.

Historical patterns offer a nuanced view. The data shows a notable tendency for momentum to carry forward. When the factor outperformed the market in a full calendar year, it has continued to outperform in the first quarter of the next year 68% of the time. This statistical tailwind provides a logical basis for expecting momentum to maintain its leadership into 2026. The average outperformance in those follow-through quarters is a solid 3.04%.

The bottom line is a market at a decision point. The froth concerns are real, anchored in valuation and historical extremes. Yet, the momentum factor has a proven track record of momentum. The path forward likely depends on whether the underlying growth stories of its holdings can justify the premium. If they can, the statistical odds favor continuation. If they falter, the froth could deflate quickly. For now, the factor's momentum is strong, but its future hinges on proving it is durable, not just fleeting.

The 2026 Catalyst Engine: Fed Policy, Earnings, and Market Structure

The path for momentum in 2026 hinges on a confluence of macro policy, corporate fundamentals, and a shifting market structure. The catalysts are real, but so are the headwinds that could blunt their impact. For momentum strategies to reignite, they need a supportive environment that rewards recent winners, but the market is signaling a potential rotation away from that very profile.

The first major tailwind is a dovish Federal Reserve pivot. With unemployment at a four-year high and inflation moderating, policymakers have ample scope to support growth. Markets are pricing in a more dovish policy stance with the expectation of a rate cut in the first quarter of 2026. Historically, Fed easing outside of recessions has provided a strong tailwind for equities, offering a supportive backdrop for risk assets. This policy shift could be the initial spark that reignites broader market momentum.

The fundamental anchor for equity performance is robust forward earnings growth. Corporate earnings have continued to surpass expectations, and analysts forecast S&P 500 earnings per share will grow around 10% year over year in 2026. This earnings-driven advance, rather than a valuation bubble, is the key driver. It provides a tangible floor for market performance and justifies a higher multiple, potentially pushing the index toward 7,700 by year-end. For momentum strategies, this growth is essential; they rely on a positive earnings narrative to sustain the momentum in high-flying stocks.

Yet the structural headwind is already in motion. The market is undergoing a rotation, and momentum ETFs are paying the price. These funds, which loaded up on the biggest winners of 2023 and 2024 like Nvidia and Palantir, have been tripped by the collapse of those very stocks in 2025. The result is a sharp underperformance, with momentum ETFs going from an average category rank of 18 in 2024 to 33 in 2025. The problem is that momentum strategies are underweight the defensive stocks that have held up best this year. As value and defensive sectors outperform, the rotation directly pressures momentum portfolios that are heavily concentrated in the recent losers.

The bottom line is a market in transition. The dovish Fed and strong earnings provide a powerful macro-fundamental engine. But momentum strategies are structurally challenged by a market that is rotating away from their core holdings. For momentum to regain its footing in 2026, it will need to not only ride the Fed and earnings tailwinds but also adapt to a new market structure where defensive and value characteristics are in favor. The catalysts are present, but the path forward is not a simple reversion to the 2024 rally.

Actionable Momentum Framework: Screening, Selection, and Risk Management

The momentum trade in 2025 has been a powerful force, but it is not a free pass. The framework for success now requires a disciplined blend of fundamental quality and technical discipline. The goal is to capture the factor's strength while building in guardrails against a "froth" correction. Here is a three-part, actionable approach for investors.

First, Anchor to Fundamentals, Not Just Price. Pure price momentum is a volatile and often short-lived signal. The winning strategy is to focus on stocks with durable growth drivers and healthy balance sheets. This filters out speculative names and targets companies that can weather volatility. The evidence shows that the strongest momentum plays are those with upward earnings revisions activity and a clear path to growth, like Sanmina Corporation, which is positioned as a leader in the Cloud and AI end-market. This fundamental anchor provides the resilience needed for momentum to compound.

Second, Deploy a Multi-Factor Screen for Quality Candidates. To operationalize this, use a screen that combines momentum with value and quality filters. The proven approach is to start with Zacks Rank #1 (Strong Buy) stocks, which are already identified as having strong earnings growth potential. Then, narrow the list to those with upward price momentum that are also trading within 20% of their 52-week highs. Finally, apply valuation discipline by requiring a PEG ratio ≤ 1 and a Price/Sales ratio ≤ 3. This screen, which typically yields around seven high-conviction picks, balances the momentum signal with a margin of safety. It ensures you are not chasing frothy valuations but rather buying quality at a reasonable price.

Third, Implement a Technical Guardrail for Risk Management. Even with a strong fundamental and technical setup, momentum can reverse. The key is to monitor the trend's health. For momentum proxies like the ETF MTUM, the 50-day moving average acts as a critical support level. The evidence shows that support is offered just below the middle of the trading band at $235. A break below this level would signal a loss of near-term momentum and could represent a near 8% pullback. This is your tactical stop-loss. It forces a reassessment of the trade thesis before losses mount. The framework is sequential: screen for quality, buy on strength, and then let the technical chart manage risk.

The bottom line is that momentum investing in 2025 is a tactical game of selecting the right players and managing their exits. By focusing on fundamentals, using a multi-factor screen, and respecting technical support levels, you can participate in the trend while protecting your capital.

December 26 Stock Picks: A Macro Strategist's Watchlist

The market's AI-driven rally is showing signs of fatigue, but momentum remains a powerful force. For investors seeking to ride the next wave, the focus should be on companies with strong earnings momentum, favorable catalysts, and a clear path to outperformance. Here are six Zacks Rank #1 (Strong Buy) stocks positioned to capitalize on current trends.

• Zumiez (ZUMZ): This retail momentum story is heating up. The stock has gained 38.2% over the last three months while the S&P 500 declined, fueled by a massive 73.8% increase in its current year earnings estimate over the last 60 days. Its A Momentum Score signals strong institutional interest, making it a pure play on resilient consumer spending in apparel and footwear.

• Expedia (EXPE): As travel demand recovers, Expedia's platform model is delivering. The stock has seen its next year's earnings estimate improve 7.9% over the last 30 days, with a projected 20.8% earnings growth rate for next year. Its diversified global supply network and strong liquidity position it to capture the next leg of leisure travel growth.

• Pan American Silver (PAAS): Silver's momentum is translating directly to the stock. PAAS shares have surged 48.5% over the last three months as the company's current year earnings estimate increased 4.7% over the last 60 days. The B Momentum Score reflects strong price action, positioning it to benefit from a potential rotation into precious metals.

• Kinross Gold (KGC): Gold's rally is a direct catalyst for this producer. The stock benefits from a 7.9% improvement in its next year earnings estimate and is positioned for a 32% earnings growth rate next year. Its focus on organic growth projects and exposure to higher gold prices provides a clear earnings tailwind.

• Allstate (ALL): In a volatile market, insurers with strong cash flows are defensive plays with growth. ALL's 0.1% improvement in its next year earnings estimate is supported by 5.7% expected revenue growth and a powerful cash-generating ability that funds a $805 million share repurchase in the first nine months of 2025. It offers stability with a growth catalyst.

• Dillard's (DDS): The retailer is finding its footing in a challenging environment. Its 3.6% improvement in its next year earnings estimate is backed by 0.8% expected revenue growth and a strategy that's driving category-specific momentum in apparel and accessories. It's a bet on brick-and-mortar resilience.