Factor watch: Why the momentum trade still has legs

The first quarter of the year saw market performance very much driven by macro and energy shocks, with elevated volatility and a rotation away from sectors seen as overvalued leading to uneven performance across the different style factors.

Through this environment, BlackRock’s factor rotation strategy – available to investors in Australia through the iShares U.S. Factor Rotation Active ETF (IACT) – outperformed the S&P 500,¹ with the team’s underweight to low volatility stocks and overweight to value stocks contributing to performance. The fund has also consistently outperformed the US benchmark index since inception.

Despite the volatility March’s downturn did not see a sustained shift into defensive sectors, with more attractively valued areas of the US share market remaining resilient.

Since then, market dynamics have shifted back in favour of the momentum factor, helping to support the strategy’s top conviction overweight to momentum stocks. In April alone the momentum factor returned more than 11%, significantly ahead of its 16% average annual return since inception.²

Source: BlackRock Systematic as of 31 March 2026. Portfolio holdings are subject to change. The specific securities identified and described do not represent all of the securities purchased or sold, and no assumptions should be made that they were or will be profitable. The securities names are the top 3 contributors to DYNF returns in Q1 2026. For illustrative purposes only. This is not a recommendation to invest in any particular financial product. *Source: ExxonMobil, 28 February 2026. **Source: Lam Research, May 2026. ***Source: Impax Asset Management, May 2026. Past performance is not a reliable indicator of future performance.

Last month, the BlackRock Systematic team rebalanced IACT in favour of momentum and value stocks, remaining neutral on quality and growth, and underweight on low volatility and small size.

The team uses over 1000 data signals to uncover opportunities to outperform –you can learn more about the Systematic platform here. In terms of factors specifically, they look at key indicators like the economic regime, the current fundamentals of each investment style, and its performance and earnings trend.

Momentum stocks have been a consistent overweight for the factor rotation strategy in the last three years during the tech-concentrated rally in US equities.

As seen in the chart below, while the fund held diversified exposures to all factors other than small cap for most of 2025, recent months have driven a more pronounced tilt toward value and momentum as US interest rates fell and new market leaders emerged from the Middle East energy shock.

IACT underlying fund (DYNF) positioning (3 years, monthly)

Source: BlackRock as of 31 March 2026. This chart shows DYNF’s monthly active factor exposures versus the S&P 500 over the past 36 months. Exposures are measured using BlackRock’s Fundamental Risk for Equities Model (BFRE US) and expressed as Z-scores, indicating how far each exposure is from the broader US market average. Colours range from red to green based on seven Z-score bands, from below -0.2 to above +0.2. Most factors correspond to their named style factors, except for quality, which refers to profitability; minimum volatility, which refers to inverted volatility; and size, which refers to inverted size.

Last month’s portfolio adjustment added further to this position – as despite the recent volatility driven by geopolitics, AI disruption and policy uncertainty, momentum stocks have continued to demonstrate resilience and compelling returns.

Source: BlackRock Systematic as of 19 May 2026. Based on positioning rationale for IACT underlying fund DYNF as of May 2026 rebalance. Opinions are subject to change and they are not a guarantee of future results.

After going neutral on value in March, the most recent rebalance also shifted value stocks back to overweight.

While the value factor looks less compelling fundamentally after a strong rally over the past year, supportive US economic and rate conditions, along with positive earnings and analyst sentiment, make value stocks modestly attractive in the team’s view.

Although still behind growth stocks from an earnings perspective, value stocks within the S&P 500 grew earnings 6% on average between 2024 and 2025, and are forecast to grow earnings another 5% on average in 2026.³

Source: BlackRock Systematic as of 19 May 2026. Portfolio holdings are subject to change. The specific securities identified and described do not represent all of the securities purchased or sold, and no assumptions should be made that they were or will be profitable. The securities mentioned are the top 3 increased and decreased stock weights, and the top 3 overweights and underweights of IACT’s underlying fund DYNF as of 19 May 2026. For illustrative purposes only. This is not a recommendation to invest in any particular financial product.

As factor leadership continues to swing over the course of 2026 and beyond, IACT can help investors tap into the power of data to access the investment style that’s most likely to outperform.

With stock dispersion in the S&P 500 Index now at its highest level since the peak of the COVID pandemic⁴, we think an active approach will become increasingly crucial to access the beneficiaries of the AI boom that’s currently driving US market growth.

You can learn more about factor rotation and how the strategy works here. With rebalances conducted on an approximately monthly basis, the Systematic team will continue to adjust the portfolio in line with market events.