Navigating Pre-Earnings Positioning: Momentum and Volatility Strategies in December 2025

As the market approaches the pivotal December 1, 2025, earnings season, investors face a complex landscape shaped by shifting macroeconomic dynamics, evolving sector leadership, and divergent positioning strategies. The interplay between momentum and volatility strategies-two pillars of modern portfolio construction-has taken on renewed significance amid heightened uncertainty. This analysis examines the performance of these strategies in the pre-earnings period, drawing on recent academic research and market behavior to outline actionable insights for positioning ahead of year-end.

Momentum Strategies: A Fragile Foundation

Momentum strategies, which historically thrive in stable, trend-following environments, have struggled in 2025 due to macroeconomic volatility and rapid shifts in market leadership. According to a report by , momentum stocks underperformed in 2025 as increased volatility disrupted trend formation, leading to frequent reversals. This aligns with broader observations from Morningstar, which noted that momentum strategies falter in environments marked by rapid leadership changes and heightened uncertainty.

The erosion of momentum in AI-driven technology and high-beta stocks has been particularly pronounced. As of late November 2025, market leadership had shifted toward later-cycle and defensive sectors, with the S&P 500 showing signs of fragility despite historical tendencies for a strong year-end rally. For instance, the index logged four consecutive weekly declines in November, while the VIX volatility index surged to nearly 28, reflecting investor unease. This volatility has also led to rotational drawdowns, with average member maximum drawdowns far exceeding index-level returns.

Volatility-Timing Strategies: A Tailwind in Turbulent Times

In contrast to momentum's struggles, volatility-timing strategies have gained traction as market conditions have become increasingly unpredictable. Research published in highlights that machine learning models for volatility forecasting have outperformed traditional benchmarks, particularly during volatile periods. By dynamically adjusting risk exposure based on predictive analytics, these strategies have delivered higher average returns and improved risk-adjusted performance.

The December 2025 earnings season has further underscored the value of volatility management. In the final week of November, the S&P 500 surged 4.47%, driven by softer economic data and shifting expectations for a Federal Reserve rate cut. However, this rally was underpinned by a fragile foundation, with earnings growth decelerating and speculative excess in unprofitable tech companies raising red flags. Volatility-timing strategies, which capitalize on such dislocations, have positioned investors to benefit from both upward momentum and downside protection.

Positioning Adjustments: Balancing Exposure and Hedging

The pre-earnings period in late November 2025 revealed a market in transition. Positioning strategies emphasized broadening U.S. equity exposure and incorporating global diversification to mitigate overconcentration in the tech sector. Small-cap stocks, for example, saw a notable resurgence, with the Russell 2000 ETF rising 8.17% as capital flowed into resilient companies with strong balance sheets.

However, liquidity constraints and macroeconomic pressures complicated positioning. The VIX 1-Day index fell near historical lows, suggesting limited upside for volatility-driven strategies. Meanwhile, thin liquidity in S&P 500 E-minis and widened bid-ask spreads pushed trading costs to multi-month highs. These conditions, coupled with a $84 billion Treasury settlement, drove overnight funding rates to 4.09%, creating short-term headwinds for aggressive positioning.

For December, the focus has shifted to hedging macro risks while capitalizing on the "Santa Claus Rally." Retail investors have maintained bullish positioning, with record options trading and a "buy-the-dip" mentality, while institutions have prioritized macro hedging. This divergence highlights the need for a balanced approach: leveraging volatility-timing strategies to navigate earnings-driven swings while avoiding overexposure to fragile momentum plays.

Conclusion: A Prudent Path Forward

As December 1, 2025, approaches, the key takeaway is clear: momentum strategies face headwinds in a volatile, fragmented market, while volatility-timing and low-volatility approaches offer more robust risk-adjusted returns. Investors should prioritize diversification, dynamic hedging, and sector rotation to navigate the pre-earnings period effectively. With the Fed's policy direction still uncertain and AI-related uncertainties persisting, a disciplined, adaptive strategy will be critical to capitalizing on December's opportunities.