Stock Momentum Continues – Can’t Stop, Won’t Stop?!

Stocks have continued their parabolic move off April lows and the three major indices are at record highs in the premarket after the latest CPI data. The stock market's current momentum, a persistent tendency for prices to continue moving in their established direction, appears remarkably resilient. 

While this trend has been fueled in part by solid economic fundamentals like strong corporate earnings and easing monetary policy, behavioral factors and institutional investment practices have created a powerful, self-reinforcing dynamic that is difficult to disrupt.

The ’Buy the Dip’ trend has been a persistent force over the last few years is intact and a hard habit to break – which has been a great thing for investors. Momentum investing has also been working; following the principle of "buying high and selling higher," has become a well-established and academically proven strategy for institutional and savvy retail investors. The sheer volume of capital deployed in these strategies reinforces trends, creating a "train" that becomes harder to stop once it's up to full speed.

The sight of rising markets can trigger a sense of urgency in investors who don't want to be left behind – the Fear of Missing Out (FOMO). This "herd mentality" can amplify buying pressure, pushing prices higher and attracting even more buyers. While many traders may be looking for cracks to the bullish momentum, those have been futile as the positive momentum continues. Tariff concerns, government shutdowns, restrictive interest rates, elevated valuations, and geopolitical risks are present but have been pushed aside with the S&P 500 (SPX) at record highs.

An area of the market that has been driving gains is in the AI sector. Opinions among analysts and investors are divided on whether AI stocks are currently in a bubble. While some signs of speculative excess are evident, most argue that the massive investment and strong fundamentals of major companies differentiate the current boom from past bubbles.  

Unlike the dot-com era, many of the leading AI players are highly profitable, cash-rich, and have strong underlying businesses. Their immense capital spending on AI infrastructure is often funded by robust free cash flow, not just debt. Even those who believe a correction is inevitable concede that timing it is difficult and historically bubbles last longer than expectations. 

Earnings season has provided the latest lift to equities with over 80% of the S&P 500 stocks that have reported beating EPS estimates, according to FactSet. Momentum moves eventually run out of steam, but nobody knows when. For now, the powerful combination of investor psychology, FOMO, the wealth effect, liquid capital, and institutional backing means the market's upward bias is firmly entrenched. However, investors should remain mindful of the risks that could ultimately disrupt this durable momentum.

Charles Schwab and all third parties mentioned are separate and unaffiliated, and are not responsible for one another's policies, services or opinions. Schwab Network is brought to you by Charles Schwab Media Productions Company (“CSMPC”). CSMPC is a wholly owned subsidiary of The Charles Schwab Corporation and is not a financial advisor, registered investment advisor, broker-dealer, or futures commission merchant.