Momentum Under Pressure: A Deep Dive into Quantitative Factors and Market Dynamics in 2024 while projecting potential rebounds in 2025

A Year of Contrasts for Quantitative Strategies

The final quarter of 2024 presented a mixed bag for quantitative investment strategies, according to Jefferies strategist Steven G. DeSanctis. Despite a strong year overall for quantitative managers, the momentum factor, particularly Price Momentum, showed significant signs of weakening in December. This blog unpacks Jefferies' observations and predictions, providing a comprehensive look at how various quantitative factors performed in 2024 and what to expect in 2025.

Momentum’s Decline: A Key Challenge for Q1 2025

Momentum factors, which focus on stocks with strong price trends, had a stellar run earlier in 2024 but faltered as the year closed.

• The first quintile to fifth quintile (Q1/Q5) spread for small-cap stocks was an impressive 22.5% for the year but dipped by 1.8% in December.

• Jefferies predicts further weakness in momentum factors during Q1 2025, citing their tendency to underperform in the first quarter.

• Stocks tracked by the Momentum ETF (DWAS) appear overvalued, raising concerns about their short-term prospects.

“We are in the camp of fading Momentum, as the rolling 12-month spread needs to cool,” DeSanctis noted.

Valuation Factors: Stability with Room for Growth

Valuation factors, which assess the relative cheapness of stocks, offered a more stable performance in December.

• Positive spreads were recorded during the month, but the rolling 12-month spread remained weak at the 37th percentile.

• Despite the flat performance in Q4 2024, Jefferies anticipates a rebound in valuation factors in 2025

  as market conditions stabilize.

Growth at a Reasonable Price (GARP): A Tough Year

GARP, a popular strategy combining growth potential with reasonable valuation, struggled in 2024.

• The Q1/Q5 spread for Q4 2024 was a modest 0.6%, while the annual spread turned negative at -4.7%.

• This lackluster performance highlighted the challenges faced by GARP strategies in navigating a volatile market environment.

Clean Balance Sheets: Underperformance Amid Market Pressures

Companies with clean balance sheets, traditionally considered safe bets, had their worst year since 2021.

• The full-year spread for this factor block came in at a disappointing -14.8%.

• Jefferies, however, maintains an optimistic outlook for 2025, favoring firms actively improving their balance sheets and reducing leverage.

With high-yield spreads near historic lows and better corporate financial health, the risk of significant widening in spreads appears minimal.

Risk Factors: Unexpected Weakness

Contrary to expectations, the Risk (Off) factor block, which typically benefits from market downturns, struggled in December.

• This block posted a -2.8% spread for the month and a -12.1% spread for Q4 2024.

• Lowest-beta stocks and those with minimal price volatility faced unexpected declines, surprising analysts and investors alike.

The Quality Factor: A Bright Spot Amid Challenges

The Quality factor block emerged as the clear winner in December, providing much-needed optimism for quantitative strategies.

• With a +4.3% spread for the month, Quality factors ended the year ranking fourth among Jefferies' seven tracked blocks.

• This block evaluates profitability levels and improvements, making it a strong contender for success in 2025.

Jefferies remains bullish on Quality factors, citing their resilience and alignment with improving profitability trends.

A Look Ahead: Jefferies’ 2025 Projections

Jefferies’ analysis indicates a challenging yet potentially rewarding landscape for quantitative strategies in 2025.

1. Momentum Factors: Further downside is expected in Q1, but a rebound may occur as valuation normalizes.

2. Valuation Factors: Anticipated improvement as market dynamics favor attractively priced stocks.

3. Quality and Balance Sheets: Continued strength, driven by profitability improvements and financial prudence.

4. GARP and Risk Factors: These blocks may remain under pressure unless market conditions shift significantly.

“Firms improving their balance sheets and reducing leverage should outperform, with limited risk for significant spread widening,” Jefferies stated.

Lessons from 2024 for the Year Ahead

The market dynamics of 2024 demonstrated the evolving nature of quantitative strategies and their susceptibility to external factors. While momentum factors faced headwinds, Quality and valuation factors offered hope for the future.

As 2025 unfolds, investors and managers must remain agile, leveraging insights from past performance while preparing for emerging trends. The key to success lies in adapting to shifting market conditions and identifying the factors poised to thrive in an ever-changing landscape.

By keeping a close watch on valuation, Quality, and balance sheet improvements, investors can position themselves to capitalize on opportunities and navigate potential challenges in the year ahead.