The crucial difference in price momentum vs. earnings momentum

Sometimes, you don’t know what you know until somebody spells it out crystal clear for you. At least that’s how I felt when I read the analysis of Kewei Hou and his colleagues on price momentum and earnings momentum.

Most investors know that both price momentum and earnings momentum are factors that can be employed to create outperformance vs. the market and to select attractive stocks.

Price momentum assumes that stocks that have shown strong price performance in the last 12 months or so will continue to rally next month. The most common explanation for this effect is investor herding. If a stock rallies, investors will try to jump on the bandwagon and buy the stock. As more and more investors ‘discover’ the stock, i.e. pay attention to its share price, more investors will buy the stock, driving prices even higher for a while.

Earnings momentum, meanwhile, depends on stock prices to rise as a company shows strong earnings growth. Again, there is a herding effect at play here with investors buying into stocks of companies that are doing well operationally in the prevailing environment.

But there is a crucial difference between the two forms of momentum. You see, earnings momentum works best if there is a post-earnings announcement drift. But post-earnings announcement drift is strongest for companies that investors don’t pay that much attention to.

What that tells you – and this is what I never put together in my head but became painfully obvious with Kewei Hou’s paper – is that price momentum should work best for stocks that investors pay lots of attention to, while earnings momentum should work best for stocks that investors do not pay attention to.

The chart below shows the key results from the new study. They looked at a range of investor attention measures like tweets, news articles, downloads from the SEC’s EDGAR database, Google search volume, etc., then they sorted US stocks based on the aggregate attention and compared the price momentum and earnings momentum factor for these stocks. And lo and behold, what seems intuitively clear happens in practice. Stocks with high investor attention show extreme price momentum effects, while forgotten stocks that are ignored by investors show extreme earnings momentum effects.

Price momentum and earnings momentum alpha vs. investor attention

Source: Hou et al. (2025)