Stocks Such as Palantir Are Off to a Strong Start in 2025 Despite Deepseek's Disruption of the 'Magnificent Seven'

Major tech companies like Apple, Tesla, and Nvidia have faced a rocky start in 2025. However, Wall Street’s momentum-driven investments continue to perform well, even without the usual boost from Big Tech. After enjoying one of their best years in nearly two decades, momentum stocks are once again leading the charge this year, despite the faltering performance of tech giants that once dominated this space.

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Through the first weeks of 2025, the Roundhill Magnificent Seven ETF (MAGS), which tracks the performance of Apple, Tesla, Nvidia, and other leading tech names on an equal-weighted basis, has managed only a modest 0.4% gain. In contrast, the S&P 500 has risen 3.1% year-to-date. Meanwhile, the iShares Edge MSCI USA Momentum Factor ETF (MTUM)—the largest momentum-focused ETF in the U.S., managing over $16 billion—has surged nearly 10%. The MTUM even hit its sixth record high of the year at $227.08 per share, though it pulled back slightly the following day, according to FactSet data.

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This strong performance builds on a remarkable 2024, where MTUM gained nearly 32%, its best year since 2017. By comparison, the S&P 500 posted a 23.3% gain in 2024, excluding dividends. Some momentum strategies performed even better. SimCorp’s long-short momentum-factor model, which tracks 3,000 stocks to provide pure exposure to the momentum factor, had its best year since 2007, according to Melissa Brown, SimCorp’s managing director of investment-decision research.

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Interestingly, Brown notes that the Magnificent Seven stocks began losing steam even before the market turbulence caused by the DeepSeek selloff in late January. Fortunately, other stocks have stepped up, taking the lead and keeping momentum strategies on track.

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At its core, factor-based investing involves building a portfolio around specific characteristics believed to drive returns. Callie Cox, chief market strategist at Ritholtz Wealth Management, explains that this approach focuses on optimizing investments around traits expected to outperform over time. Factors can also help create diversified portfolios, reducing risks that come from overexposure to any single asset type or sector.

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While factors can be based on various attributes, five dominate the U.S. investment landscape: quality, value, momentum, size, and volatility. Among these, momentum has stood out in recent years. Piper Sandler’s Michael Kantrowitz highlights that momentum outperformed all other factors in 2024 and seems poised to repeat that success in 2025. This resurgence follows a challenging period for momentum strategies in 2022 and 2023.

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What Is Momentum Investing?

Momentum investing focuses on buying stocks that have delivered strong risk-adjusted returns over the past three to twelve months while avoiding or shorting those that have underperformed. This strategy gained widespread attention following a 1993 research paper by Narasimhan Jegadeesh and Sheridan Titman, which showed that momentum strategies could consistently outperform the market over time.

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Although the MTUM ETF follows a long-only strategy, many momentum models incorporate both long and short positions. Interestingly, momentum principles apply beyond stocks, proving effective in international markets and even in asset classes like bonds.

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However, the reasons behind momentum’s success aren’t entirely clear. The strategy challenges the efficient-market hypothesis, which suggests that past price movements can’t predict future returns. Some researchers, like SimCorp’s Brown, believe momentum works because markets take time to fully absorb new information.

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BlackRock’s Bob Hum offers another perspective: investors are naturally drawn to winners, creating a “FOMO” (fear of missing out) effect that drives prices higher as more people pile into trending stocks. This behavior, he argues, helps sustain momentum’s effectiveness over time.

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One key to momentum’s ongoing success is its adaptability. The MTUM ETF, which tracks an MSCI index, is rebalanced quarterly, allowing up to 30% of its holdings to change with each update. This flexibility helps the fund adjust to shifts in market leadership.

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For instance, in recent quarters, financial stocks have gained prominence in the MTUM portfolio, now accounting for 24% of its holdings—10 percentage points higher than their weighting in the S&P 500. John Davi, CEO of Astoria Portfolio Advisors, notes that financials have been performing strongly, justifying their increased presence.

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Conversely, MTUM has reduced its exposure to Big Tech names like Apple and Microsoft, which have lagged behind the broader market in recent months. According to Hum, it’s common for MTUM’s portfolio of 125 stocks to undergo significant turnover from year to year.

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The market environment of 2024, marked by steady trends and gradual shifts in leadership, was particularly favorable for momentum investing. Hum explains that prolonged trends benefit momentum strategies, while sudden reversals pose greater challenges.

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Looking back over the past two years, MTUM’s top holdings reflect the dynamic nature of momentum investing. In late 2022, energy, healthcare, and consumer staples dominated the fund, reflecting energy stocks' outperformance during a challenging year for the broader market. The S&P 500 posted its worst calendar-year performance since 2008 that year.

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By the end of 2023, the ETF had shifted heavily toward the Magnificent Seven, which drove much of the S&P 500’s gains. These tech giants made up four of MTUM’s top five holdings and six of the top 10.

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However, 2024 marked another shift. While companies like Broadcom and Nvidia remain key holdings, other tech firms such as Palantir Technologies and Oracle have joined the ranks. Although technology stocks still feature prominently, their dominance has waned compared to the previous year.

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Astoria’s Davi suggests that this evolving leadership indicates tech stocks can continue to perform well, even if the Magnificent Seven are no longer leading the charge. Moreover, momentum is spreading to stocks in other sectors, signaling broader market participation.

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Over the past six months, Wall Street analysts have significantly upgraded earnings forecasts for many top-performing momentum stocks, even as they’ve lowered expectations for the broader S&P 500. Kantrowitz points out that earnings-per-share (EPS) revisions have become highly correlated with momentum performance in 2025, with stocks across all sectors benefiting from positive EPS revisions.

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Momentum investing can deliver exceptional returns when trends are favorable. However, it’s not without risks. As SimCorp’s Brown notes, momentum strategies tend to outperform consistently until market sentiment shifts dramatically. When that happens, losses can accumulate quickly. But history shows that momentum has a knack for bouncing back, often regaining its strength after periods of underperformance.

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