Insights into the Momentum Life Cycle for European Stocks

Abstract

This article evaluates price and earnings momentum strategies constructed using either single or multiple criteria not only to establish how these strategies performed in the major European markets over the last 15 years but also to enhance our knowledge as to how to place a stock in its momentum life cycle. In terms of performance, we established that price momentum strategies outperformed earnings momentum strategies but that they complemented each other when combined. We also established means for enhancing both price and earnings momentum strategies and determined what combination of price momentum with enhanced earnings momentum produced the best results both at the country/region level and the aggregated level. These findings suggest that the earnings forecasts made by the equity analysts provide a good indication as to the positioning of a stock in its momentum life cycle. However, subsequent analysis established that this is only true for wining stocks and that these forecast provide no incremental information when it comes to predicting the future performance of losing stocks over the holding periods considered.