This quarter, and indeed this year has seen one of the strongest momentum markets on record.
Momentum today is made up of the following companies:
Anything deemed an AI winner,
Anything exposed to a steepening yield curve.
So, for example, things like US banks alongside European defense and global aerospace.
In our view, the extreme momentum returns are a signal that investors should proceed with caution.
Only a handful of other periods over the past 70 years have seen more extreme returns to momentum than what we're seeing today.
The chart above shows the performance of those stocks with the highest price momentum characteristics, relative to the most stable stocks.
To us, it feels like earnings and price momentum are one of the only things that the market really cares about at the moment.
Valuation, quality, they're very much secondary.
So we, as I said earlier, think proceeding with caution should be the mantra of the day.
Why this is happening comes back to our last quarterly letter.
The market's participants have changed dramatically over time, and now well over half of the market's daily trading volume is done by investors who are momentum focused with very short time horizons.
The most important momentum debate today, in our opinion at least, is where we are in what may potentially be an AI driven bubble.
Many exceptionally smart participants are weighing in on both sides of the debate, and it’s difficult to draw a binary conclusion.
Unfortunately, it's almost impossible to predict when momentum shifts might change, but it pays to be prepared.
As such, we're preparing the portfolio for a wide range of potential outcomes, but we thought we'd give you a bit of a flavor for our thinking.
So firstly, Nvidia's recent investments in open AI, which will end up back in Nvidia's pockets, certainly have echoes of the tech bubble.
However, there are also things that are very different.
For one, the AI winners can broadly still be valued on PE and free cash flow due to prodigious free cash flow generation.
However, it's hard to argue anything but AI success is priced into wide swathes of the market, and we'd include industrials, utilities and many other companies that you might not necessarily think of when you think of the traditional AI winners.
There are also rhymes with 2021.
The IPO and Spac indices are performing extremely well, which speaks to more speculative than average markets.
There are also some market darling names valued on silly multiples of sales.
Equally, we don't have people spending millions of dollars on digital pictures of monkeys, if anyone remembers nonfungible tokens.
Our conclusion is that momentum risk is not only building, but has built.
And therefore, once again, we are proceeding with caution.
The good news is that the market's binary approach is throwing up lots of good opportunities for us to take advantage of.
ASML, for example, saw their shares derate to an almost decade low PE earlier this summer.
We use this opportunity to build a large position in an exceptional company.
In the space of a few weeks, the market has gone from fretting about demand for ASML tools, to once again perceiving company as an AI winner.
We were delighted to be able to make ASML a material position at such an attractive valuation.
London Stock Exchange Group has seen a dramatic derating in its stock, as the market has chosen to put it in the AI loser bucket.
Our view is that the future, and the more likely course of action, is that LSC group's valuable data sets and plumbed in nature prevent this kind of disruption.
In fact, LSC could well benefit from their partnership with Microsoft as they work to improve their innovation cadence and enhance and accelerate their revenues.
Year to date, LSE has gone from trading at 30 times PE to more like 20 times.
Meanwhile, earnings and dividends have continued to compound nicely.
Universal Music Group suffered a similarly painful derating, with the shares derating by almost 5 PE points, as the market has become fretful about AI musicians disrupting listening habits.
Our opinion is that the more likely course of action is that consumers will continue to want to connect with human musicians, rather than shifting substantially to AI.
New holding, Elis fits more into the neglected category because it isn't in an exciting corner of the market.
Elis is involved in it in the not so exciting, but to us, potentially very, profitable world of laundry.
They specialise in the rental, cleaning and maintenance of textiles, and workwear. Elis pays a healthy almost 2% dividend yield and has more than doubled its free cash flow per share over the past decade.
We think it's safe to say that Elis is unlikely to get disrupted by AI.
This is a business that gets stronger with scale.
Its laundry routes improve network density, which boost margins, and we are very happy to buy into this steady dividend compounder, an attractive teams PE.
In terms of some of our winners and losers, Rolls Royce continues to go from strength to strength as the market appreciates the quality of the civil aero franchise and the potential for continuing profitable growth there.
Adding exposure to rapidly growing US European defense budgets and optionality on nuclear small modular reactors, and there's continued potential for high and long duration earnings growth.
Moving to some of the stock changes we've made in the quarter.
CME Group, was a company that we sold to fund more attractive opportunities elsewhere.
We like CME franchise very much and would be very happy to own the shares once again at a more opportune valuation.
With that, thank you so much for your time and I look forward to speaking to you again soon.
Q3 2025 has been one of the strongest periods for momentum on record. But beneath the surface of AI winners and speculative rallies, risks are building. In this update, Invesco Global Equity Income Co-Fund Manager, Joe Dowling, explores what’s driving the market, how we’re positioning the portfolio, and where we’re finding opportunity amid the noise.
00:06: Market overview: The momentum surge
01:10: Changing market participants
01:30: Is this an AI bubble?
01:46: Portfolio positioning: Caution and opportunity
03:12: Other portfolio updates
06:10: Closing thoughts
Joe Dowling is a Co-Fund Manager for the Global Equity Income & Growth strategy. Find out more about the fund and investment trust solutions, which are managed according to this strategy, below.
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