The momentum investing strategy of buying stocks that have shown the strongest and most recent upward price momentum has continued to deliver stellar returns in 2024, especially for investors piling into leading artificial intelligence (AI) and technology names.

However, market experts caution that these dizzying gains may not be sustainable and a momentum crash could be on the horizon.

Momentum Kings of 2024: Tech Dominates

The first quarter of 2024 saw several high-flying stocks notch massive gains, leading major market indices to new all-time highs.

Chip maker Nvidia, a key enabler of advanced AI systems, has been one of the best-performing momentum stocks this year, delivering gains of more than 80% in the first quarter alone.

Other big AI/tech winners displaying potent upward momentum include Microsoft (MSFT), Google’s parent company Alphabet, Meta Platforms, Amazon, Apple, and Netflix.

These pandemic darlings and prospective AI dominators have attracted a flood of investor capital, turbocharged by the viral success of OpenAI’s ChatGPT and the boundless perceived potential of generative AI.

As these stocks have kept their relentless climb higher, more and more momentum money has been poured in, creating a self-reinforcing upward spiral. However, experts warn that the party will not last forever and that momentum investing can often resemble a musical chair game.

“Momentum investing works until it doesn’t, which is why it is so risky”, warns Charles Lieberman, CIO at Advisors Capital Management. “Some of the tech companies have excellent prospects, but that is recognized by the market, so they are highly valued. But even a slight falter in their prospects exposes them to large declines.”

The Risks of Chasing the Momentum Trade

While the momentum wagon has been the place to be in 2024, with many long momentum portfolios posting stellar double-digit returns year-to-date, several experts have voiced their reservations about blindly jumping aboard the momentum train at current lofty valuations.

“Momentum is dangerous at all times, but especially when it is driven by a tech rollout,” Kim Forrest, CIO at Bokeh Capital Partners, told Bankrate recently. “No one knows when generative AI will slow spending, but when it does, the stocks that are tagged as participating will get killed.”

Brad McMillan, CIO at Commonwealth Financial Network, believes that momentum can work in a portfolio but cautions about oversized bets. “As long as the position is right-sized based on the potential return and risk that an allocation would add to a portfolio, we believe there is a place in a well-diversified portfolio. That said, the key to momentum investing is getting the timing right and that is certainly not easy.”

Some advisors steer clear of momentum plays entirely, favoring a more fundamental, value-driven approach. “As a long-term fundamental investor, there is no place for momentum investing in my world”, asserts Michael K. Farr, President and CEO of Farr, Miller & Washington. “I would advise individual investors to allocate only a small percentage of their investable dollars to momentum strategies.”

History has shown that momentum strategies can lead to spectacular flameouts. A notable recent example was the momentum reversal that occurred in November 2020 when underperforming value/cyclical stocks surged higher on positive vaccine news while prior momentum leaders got crushed.

Some warning signs are flashing that the current momentum frenzy could be ripe for a similar crash. Momentum has become a very crowded trade this year, with copious fund flows pouring into the strategy. JPMorgan analysts warn that it is the most crowded strategy since the 2008 financial crisis.

Also read: Is the Stock Market in a Bubble? Warren Buffet’s Favorite Market Signal Says Yes

Additionally, any material reacceleration in inflation or sooner-than-expected Fed rate hikes to combat rising prices could abruptly deflate the AI/tech bubble and spark a violent momentum reversal. A reflationary rotation out of the tech/growth winners and into more cyclical/value areas like energy, financials, and industrials would be the likely result.

“We may be at higher risk of a momentum crash because inflation might not come down as smoothly as equity markets are expecting,” says Stacie Mintz from PGIM Quantitative Solutions. “Timing momentum is tricky – it’s like riding a wave and trying to decide when to jump off before it crashes.”

Pursuing Momentum in a Diversified Way

While chasing hot momentum names can be a lucrative endeavor if done right, most experts recommend a more measured and diversified approach. This approach aims to both limit downside risks and capitalize on potential new momentum leaders in different sectors.

“Better to invest across all investment themes by buying the market index”, suggests Dec Mullarkey from SLC Management. “If investors are switching themes, that may have little effect on your overall index performance as you hold the stocks they are targeting.”

Others highlight broader thematic opportunities from factors like still-healthy economic growth and falling interest rates in 2024. “I think it is still ok to invest in momentum stocks with strong fundamentals”, says Chuck Carlson, CEO of Horizon Investment Services. “These stocks are still showing top- and bottom-line growth.”

Morgan Stanley strategists favor a budding “reflation trade” that could spur new momentum from the overall economic improvement and cyclical plays. “With the Fed appearing to be less concerned about inflation or looser financial conditions, reflation trades are coming back into vogue”, analysts from the reputed investment bank wrote in a recent note, upgrading energy stocks to overweight given the latest tailwinds experienced by oil prices and their cheap valuations.

At Jefferies, analysts recommend momentum investors to rotate into stocks exhibiting both upward price momentum and rising earnings estimate revisions. Top ideas include Nvidia, Netflix (NFLX), and Gap.

Ultimately, momentum is best deployed in moderation as one component of a diversified portfolio approach rather than going all-in on the hottest trade of the moment.

The Income Dilemma: Reinvest or Spend?

person selecting and analyzing momentum stocks

With markets delivering solid returns across asset classes lately, many investors could find themselves receiving a flush of income from dividends, interest on cash holdings, and portfolio distributions. A key consideration is how to best redeploy that income – whether to reinvest for growth or spend/save for nearer-term needs and goals.

Long-Term Growth Still the Priority

For investors with a long-term horizon, most experts recommend prioritizing growth assets like stocks over income investments in order to maximize compounding returns over decades. Even with double-digit yields available on cash and short-term bonds, advisors still favor stocks for their growth potential.

“Stocks win over any kind of reasonable long-term horizon”, Lieberman emphasizes bluntly. “Holding CDs is appropriate only for expected short-term cash needs or to guard against unexpected large expenses.”

Meanwhile, Sam Stovall, Chief Investment Strategist at CFRA Research, agrees: “Longer-term investors would likely post greater total returns with income-oriented stocks than with CDs since stocks not only earn income but also offer price-appreciation potential.”

The Importance of Strategic Income Investing

For investors seeking to responsibly invest surplus income rather than spend it outright, experts suggest utilizing a versatile mix of income strategies aligned with individual goals and timelines. This could include emphasizing different income asset classes, balancing current income needs with growth potential and diversifying income sources.

“Asset allocation is generally very important in investment performance over time”, says Michael K. Farr. “Investors need to figure out what they need in terms of returns and liquidity and what they’re willing to endure in terms of risks.”

Also read: How to Invest in Stocks Online for Beginners

“The general principle, that younger people should invest more in equities for retirement and then rebalance to fixed income as they get closer to retirement, still holds”, notes Dec Mullarkey from SLC Management. However, variations exist for different income needs, risk tolerances, and investment horizons.

One favored strategy for boosting income and total returns is emphasizing dividend-paying stocks and stock funds. “Incorporating a dividend strategy is a worthwhile pursuit for any investor with a longer time horizon”, recommends Patrick J. O’Hare, Chief Market Analyst at

Finding the Right Mix Depends on Your Individual Profile

Leading advisors stress finding the right balance between income-generating investments and growth assets based on individual financial profiles and objectives. This could mean a barbell approach using cash and bonds for income and stocks for growth. It could also mean implementing a systematic withdrawal strategy from a diversified, income-producing portfolio.

“If you have a long-term horizon, then growth is more important than income,” says Mullarkey. “Therefore at the most basic level, you would allocate most of your assets to growth opportunities like equities and have a modest allocation to fixed income such as bonds or cash.”

No matter the allocation strategy employed, investors must weigh income needs, risk tolerance, time horizon, and total return goals when determining the optimal mix of income and growth investments. Having a clear, personalized plan is critical to long-term financial success.

While momentum investing has delivered breathtaking gains lately for investors piling into market darlings like the AI/tech innovators, the strategy comes with substantial risks of a potential crash that could wipe out years of profits in a matter of weeks. Experts recommend a diversified approach incorporating momentum as one component rather than solely relying on this strategy just because it has worked recently.