Is the Year-End Rally Still Possible? Finding Opportunity in Low P/E Momentum ETFs

The final weeks of December traditionally signal a period of bullish sentiment—the so-called Santa Claus Rally. Yet as markets head into 2026, a more complex picture emerges. Macro headwinds ranging from persistent inflation to stretched valuations in high-growth sectors have left many investors uncertain whether to embrace seasonal optimism or exercise caution.

The Macro Backdrop: Why Hesitation Makes Sense

Inflation Remains Sticky

The Federal Reserve continues its battle against persistent price pressures, with inflation readings still elevated. The Consumer Price Index came in at 2.7% year-over-year, while the Fed’s preferred metric—the personal consumption expenditures price index—registered 2.8% in September. These figures sit above the Fed’s 2% target, suggesting that aggressive rate cuts are unlikely in 2026. Such expectations may temper enthusiasm for traditional equity participation during the holiday season.

Tech Valuations Under Scrutiny

The artificial intelligence rally has sparked legitimate concerns about stretched P/E multiples in the technology sector. Major financial institutions, including Goldman Sachs and Morgan Stanley, warned of potential 10-20% market corrections over the next 12 to 24 months. While Goldman Sachs CEO David Solomon acknowledged the possibility of equity pullbacks, the key question remains: will AI-related capital expenditures by tech companies translate into sustainable earnings growth?

But There Are Silver Linings

Despite macroeconomic concerns, recent economic data suggests pockets of resilience. Consumer sentiment improved in December, reaching 52.9 according to University of Michigan surveys. Housing transactions, though tracking toward a 30-year low for 2025, have posted gains for three consecutive months. These positive indicators suggest that selective momentum-based strategies could capture near-term strength.

Momentum Investing: A Strategic Play During Uncertainty

Momentum strategies focus on capturing gains from securities exhibiting relative strength and positive price trends. This approach appeals to investors seeking outsized returns over shorter time horizons. Given current market volatility and valuation concerns, tapping into momentum vehicles with reasonable P/E multiples—particularly those below or near the SPY benchmark of approximately 29.0X—presents a compelling tactical option.

Four Low P/E Momentum ETFs Worth Watching

Invesco S&P MidCap Value with Momentum ETF (XMVM)

• P/E Multiple: 10.73X
• One-Month Performance: +10.8%
• Fee Structure: 39 basis points

This fund targets mid-capitalization stocks from the Russell Midcap Index that demonstrate strong momentum and value characteristics. The low P/E makes it attractive for value-conscious momentum seekers.

Invesco S&P SmallCap Value with Momentum ETF (XSVM)

• P/E Multiple: 10.92X
• One-Month Performance: +10.6%
• Fee Structure: 37 basis points

Drawing from the Russell 2000 Index, this ETF identifies smaller-cap securities with compelling value and momentum profiles, offering broad small-cap exposure at an economical valuation.

Invesco Dorsey Wright Basic Materials Momentum ETF (PYZ)

• P/E Multiple: 25.53X
• One-Month Performance: +11.2%
• Fee Structure: 60 basis points

This fund harnesses technical strength indicators within basic materials, selecting at least 30 companies from a universe of approximately 3,000 US-listed stocks that exhibit relative strength.

Cambria Value & Momentum ETF (VAMO)

• P/E Multiple: 13.92X
• One-Month Performance: +7.1%
• Fee Structure: 65 basis points

The fund invests in 100 domestic equities with market capitalizations exceeding $200 million, blending value and momentum disciplines to balance capital preservation with growth potential.

The Bottom Line

While macro uncertainties warrant caution, the case for tactical participation through momentum-focused strategies with attractive P/E valuations remains defensible. As the year concludes, investors need not choose between conviction and prudence—strategic positioning in low-multiple momentum vehicles offers a middle ground that acknowledges both risks and opportunities.