Earnings Momentum Strategy

Designed and back tested an active earnings momentum strategy using S&P 500 stocks, constructed a composite EPS based momentum score and implemented annual rebalancing. Applied quantitative portfolio construction and performance evaluation techniques including CAGR, volatility, Sharpe ratio and drawdown analysis. Demonstrated strong skills in financial analysis, factor-based investing, benchmarking and risk-adjusted return assessment.

Methodology

The portfolio is constructed using an earnings momentum strategy applied to S&P 500 firms over the 2014-2024 period, with rebalancing at the start of each calendar year. The investment universe is restricted to S&P 500 constituents to ensure high liquidity, avoid size-related distortions and allow direct benchmarking against the index.

For each year, a composite earnings momentum score is calculated for all eligible firms using quarterly EPS data available before January 1. This score is the Z-score sum of three components: year-over-year quarterly EPS growth, trailing twelve-month EPS growth and earnings growth acceleration. These metrics collectively capture the consistency, recency and rate of change in earnings performance.

The top 10 firms with the highest composite scores are selected, equally weighted and held for a full 12-month period before the portfolio is rebalanced and reconstructed for the next year.

"The strategy tests whether persistent and accelerating earnings growth can translate into durable excess return against the S&P 500."

Results

The backtest shows that the earnings momentum strategy substantially outperformed the S&P 500 benchmark over the 10-year period. The strategy generated a total return of 432.21%, nearly doubling the benchmark's 224.90%, and delivered a significantly higher annualized return of 16.52% compared with the benchmark's 11.38%.

Although the strategy exhibited slightly higher volatility at 18.82% versus 17.35%, the superior risk-adjusted performance is evident in its Sharpe ratio of 0.88, which exceeds the benchmark's 0.66. The maximum drawdown was deeper for the strategy at 38.54% versus 33.92%, reflecting the higher sensitivity of momentum-based portfolios during market stress.

Overall, the results indicate that selecting firms with strong, persistent and accelerating earnings growth produced meaningful excess returns relative to the S&P 500, despite modestly higher risk.