The stock market’s recent rally has stalled. If the rally resumes, so-called cyclical stocks will perform particularly well.
The stock market was on a tear—until it wasn’t. The S&P 500 is down to just over 3900 from a multiweek closing high of almost 3999, hit July 21. But until that mini pullback, the market was on quite a run. At its current level, the S&P 500 is still about 7% above its closing low for the year hit in mid June. The gain has been driven by hopes—and indications—that inflation has peaked, which makes it more likely that the Federal Reserve will soon slow down the pace of interest-rate hikes.
So if the overall rally can resume, cyclicals, or economically sensitive stocks, can continue their recently strong performance. Cyclical stocks, like consumer discretionary names, financials and manufacturers, see higher sales and earnings results when economic demand strengthens. And if the Fed does slow down its rate hikes soon, that would certainly help economic demand. During the recent rally, cyclicals have outperformed defensives—or companies whose profits have minimal sensitivity to changes in economic demand—according to 22V Research.
“A continued market rebound should be a support for Cyclicals,” writes Dennis Debusschere, founder of 22V Research.
Specifically, bank stocks and consumer discretionary names within the broader services sector are candidates to continue their recently strong performance.
The SPDR S&P Bank exchange-traded fund (KBE) has gained just over 9% from its mid June bottom. Banks make more loans when economic demand is stronger and they have more cash available to invest when consumer and business credit is on better footing.
Restaurant stocks have also performed relatively well. Bloomin’ Brands (BLMN), owner of Outback Steakhouse and Carrabba’s Italian Grill, has seen its shares rise almost 10% since their mid June lows. Yum! Brands (YUM), owner of Pizza Hut and Taco Bell, has seen its stock gain almost 9% from a mid June low point. Starbucks (SBUX) stock is up 14% since a near-2022 low hit in mid June. Not only do the earnings of these companies have sensitivity to changes in consumer demand, but they are also benefiting from pent-up demand, as dining out was less safe during the pandemic. So these companies don’t have to worry about the falloff in consumer demand for at-home goods that Walmart (WMT) and Target (TGT) must deal with.
Other areas could also excel if the rally resumes. Technology stocks have also outperformed the S&P 500 during this run, but maybe cyclicals and tech can run upward together.
Write to Jacob Sonenshine at firstname.lastname@example.org