Boom and bust: the role of business cycles in stock momentum strategies

Purpose – This study aims to explore how the performance of momentum strategies varies across business cycles and economic crises, aiming to bridge theoretical models and practical asset pricing applications. Design/methodology/approach – Using monthly US data from 1992 to 2024, the authors examine multiple momentum strategies, including traditional price-based (stock-on-stock) and real-sector-based (economic sector-on-stock) models. These strategies are analyzed across “UP” and “DOWN” phases of three business cycle indicators: Industrial Production, ISM Manufacturing and the S&P 500 index. Findings – Momentum returns are significantly higher during economic UP states, especially under ISM uptrends. The 2–3 real-sector strategy yields average quarterly returns of 1.25% in UP states versus 0.33% in DOWN states, along with stronger Sharpe ratios. However, momentum performance deteriorates sharply during downturns and crisis periods, revealing fragility under economic stress. Research limitations/implications – The study focuses on US data and macroeconomic indicators; extensions to international contexts or firm-level fundamentals may offer additional insights. Practical implications – The results emphasize the importance of adapting momentum strategies to macroeconomic conditions, helping practitioners align asset allocation decisions with real-sector signals. Social implications – Better-informed investment decisions can support more stable capital markets, especially during times of macroeconomic uncertainty. Originality/value – This paper offers a novel momentum strategy framework that integrates real-sector dynamics with business cycle indicators, challenging static models such as the CAPM and extending the literature on state-dependent asset pricing.