And meme stocks popular with individual investors have been on a tear again. Shares of movie-theater operator

AMC Entertainment Holdings Inc.

jumped 36% Thursday, continuing a string of double-digit gains that pushed them to $26.52, their highest close in four years. The recent rally in

AMC

shares has catapulted them above levels recorded during the initial retail-driven frenzy in GameStop Corp. and other stocks this January. On Thursday, AMC was the most actively-traded stock in the U.S. market, according to Dow Jones Market Data.

GameStop has advanced 46% this month, far outpacing the S&P 500’s gain of 0.5%. Shares of Hertz Global Holdings Inc. have nearly tripled in May.

Short sellers who bet against GameStop, Hertz and AMC—a group targeted by many smaller investors who have favored these stocks—have lost almost $9 billion this year, according to data provider S3 Partners.

“It feels great,” said Daniel Shin, a 35-year-old individual investor based in Edison, N.J., who bought shares of AMC in January and has added to his positions since. “It feels like us against them. Like retail against Wall Street.”

This year’s reversal has riveted the financial industry and fueled a surprising revival for some apparently moribund businesses, helping AMC narrowly avert bankruptcy and paving the way for GameStop to raise money by issuing shares. Those episodes were the ultimate victory for small Main Street investors who are often derided in markets as “dumb money.”

Meanwhile, hedge funds—the “smart money” of years past—have continued to make a lackluster showing. From January through April, a weighted index tracking the performance after fees of about 1,300 hedge funds climbed 8.7%, according to data provider HFR. That lagged behind the S&P 500, which rose 11% over the same period.

The market’s upside-down turn, featuring a sustained rally in smaller companies with shaky financials and easy fortunes made by some early buyers of these shares, doesn’t make everyone happy. Analysts and portfolio managers recall that the market meltdowns of 2000 and 2008 were preceded by roaring bull markets in speculative areas such as dot-com startups and mortgage finance. When those manias ended, the broader economy paid the price.

Millions of individual investors stampeded into the market last year, enticed by zero-commission brokerages and easy-to-use investing apps, and their interest helped fuel the post-pandemic rally. That, and the fervor with which many small investors have piled into market winners, have potentially set the stage for severe selloffs if spooked investors flee hot stocks en masse.

That is in part because they are riding one of the most powerful forces in markets over the past year: momentum investing, or buying assets simply because the price is rising. The rising prices of assets from dogecoin, a cryptocurrency created as a joke, to Hertz shares have attracted buyers, whose demand has driven prices even higher. That, in turn, has drawn even more buyers, in part because of a behavior dubbed FOMO—the fear of missing out.

Data from Vanda Research show individual investors tend to pour far more money into stocks with high momentum than low momentum.

Paktra Som, a 35-year-old pilot based in Los Angeles, said he jumped into the market for dogecoin in 2019 and has since kept buying, looking to ride its continued ascent. Dogecoin has skyrocketed more than 6500% this year despite a recent pullback.

“If there is a large increase in volume in something and there is a clear trend of direction that it is going…the result is typically rewarding as long as you know when to sell,” Mr. Som said. “Dogecoin had no solid fundamentals to [base] my investing strategy on. But the volume of buyers was always there.”

Other investors aren’t tracking trading volumes or momentum. Rather, they are relying on their gut.

“God told me to put money into Hertz,” said Damien Roscoe, a 42-year-old electronic technician in Glenwood, Ill. “I know it sounds crazy.”

Mr. Roscoe says he made about $8,000 in profits from buying Hertz shares this spring.

The car-rental company has become one of the most unlikely success stories. Hertz declared bankruptcy last year as coronavirus lockdowns and travel restrictions devastated its business. Financial professionals fretted as individual investors snapped up the shares, warning that stock in insolvent companies usually ends up worthless.

But buyers had the last laugh after a bankruptcy court this month approved a winning auction bid in which Hertz stockholders would get more than $7 a share. The stock was trading at less than $1 in March.

“Everyone was, ‘Y’all are stupid for buying stock in a bankrupt company,’” Mr. Roscoe said. “But driving around…I just believed in it.”

In one sign of how powerful the run for meme stocks like Hertz has been, investors who didn’t hold GameStop shares this year would have lagged behind the Russell 2000 value index by almost 1 percentage point even if they held every other stock in the gauge through Tuesday, according to Ted Aronson, a longtime value investor and founding partner of AJOvista, his new investment firm. Value investors seek to buy shares at a discount to their net worth, essentially sifting through out-of-favor assets for bargains.

Mr. Aronson gave $10 billion back to investors at AJO, his old firm, after a stretch of underperformance.

He compared the recent run in meme stocks and other speculative bets to the internet craze in the late 1990s.

“You just have the herd mentality bidding stuff up based on rumor or Reddit or TikTok,” Mr. Aronson said. “This is just payback for a long time when we had it relatively easy, when value investing worked really well and any monkey could do it.”

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com and Alexander Osipovich at alexander.osipovich@dowjones.com