Abstract
Markets are often explained as reacting to discrete news events, yet many price movements unfold gradually, even when little new information appears. This research note proposes narrative momentum as a mechanism of expectations formation: the idea that beliefs shift through repeated framing and reinforcement over time, rather than through single headlines. The goal is to understand why markets continue to reprice risk and growth long after the initial facts are known.
Building on Prior Work
This framework builds on existing research in behavioral finance and narrative economics. Robert Shiller’s work on narratives and market dynamics, along with decades of research on gradual information diffusion and delayed price discovery, established that interpretation matters as much as information. This essay extends that insight by focusing specifically on the mechanics of how narratives gain momentum and reshape expectations even after initial facts are known.
Narrative Momentum
By narrative, I mean a structured interpretation that links events to a forward-looking story. Narrative momentum refers to the persistence of that interpretation once it becomes dominant. Momentum does not come from novelty, but from repetition: similar framing across commentary, new events being interpreted through the same lens, and growing attention to how others are responding.
At that point, the signal markets process is no longer the event itself, but the persistence of the interpretation.
Expectations vs. Information
Traditional explanations emphasize information arrival. This assumes that interpretation is immediate and fixed. In practice, interpretation evolves. Even when facts are public, their implications are ambiguous. Market participants update on how meaning is formed and reinforced over time, not just on the facts themselves.
A Simple Mechanism
Narrative momentum unfolds in three steps:
- Initial framing: An event introduces a plausible interpretation.
- Reinforcement: Subsequent coverage references the same interpretation across contexts.
- Expectation shift: Beliefs adjust because the narrative has become dominant, not because of a single decisive update.
Example: Nvidia and the AI Infrastructure Narrative (2023–2024)
Consider Nvidia’s revaluation during 2023–2024. The company’s dominance in AI chips was known before ChatGPT launched in late 2022. The technical specifications of its H100 GPUs were public. Major cloud providers had already been ordering them.
Yet Nvidia’s stock didn’t simply jump on a single earnings report. Instead, it underwent a gradual revaluation that lasted months.
Initial framing (Q1 2023): ChatGPT’s viral adoption created a new interpretation: AI wasn’t just a research project, but a platform shift requiring massive infrastructure buildout.
Reinforcement (Q2–Q4 2023): Each subsequent data point was interpreted through the same lens: confirmation of an AI infrastructure boom.
Expectation shift: By late 2023, the market was reacting less to new information and more to the persistence and coherence of the narrative itself.
What This Helps Explain
- Gradual valuation re-ratings
- Continued price movement without clear catalysts
- Resistance to contradictory data once a narrative is established
Limits and Caveats
Narrative momentum is difficult to measure cleanly and risks ex post interpretation. In the Nvidia example, one could argue the market was simply adjusting to genuinely new fundamental expectations rather than being driven by narrative reinforcement. Distinguishing between these mechanisms empirically is challenging.
Closing
Markets do not simply react to headlines; they evolve as expectations form over time. Narrative momentum highlights how interpretation, rather than information alone, can shape price dynamics. This research note reflects an early attempt to formalize questions that emerged from my own market analysis and independent work.