Momentum is a proxy for sales growth

Theories explaining momentum typically fall into behavioral, risk-based, or market structure categories, often avoiding the harder question of what economic force actually drives momentum. Yet for U.S. large-cap stocks, data suggest that momentum has closely tracked returns to sales growth over the past eight years.

The charts here show cumulative factor returns for 1-year price momentum and sales growth in the S&P 500, using sector-neutral, long-short portfolios rebalanced monthly. The top chart covers the past two years; the bottom spans nearly nine years from July 2016.

While there are periods of divergence, the two factors tend to revert toward each other. Based on the data, it's reasonable to view momentum as a proxy for the return to sales growth, augmented by exposure to other short-lived factors. The data are sector-neutral and span all sectors, so the proxy relationship reflects an aggregate pattern that may differ at the sector level. Sales growth's return has trended higher for over a year. Momentum should, in general, follow that directional trend.