Cyclical Stock Rotation Has Further Room to Run, Says Goldman
The rotation into cyclical stocks since November has further to go, even as investors push segments of the market to record highs and bond yields rise further, according to strategists including those at Goldman Sachs Group Inc.
A gap remains between Goldman’s U.S. growth forecasts and what’s been priced into the markets, especially after factoring in President Joe Biden’s latest $1.9 trillion stimulus package, strategists Dominic Wilson and Vickie Chang wrote in a report Tuesday.
“Our core asset market stance has been to ‘keep the faith’ on cyclical assets,” the strategists said, adding that rising rates will not be enough to derail that view. Further upgrades to cyclical pricing were likely in the near-term, they said.
Investors have been rotating into such economically sensitive stocks since late last year on growing expectations for a global rebound as vaccine roll-outs gather pace. Energy is the top-performing industry within the global benchmark MSCI All-Country World Index with a 22% gain so far this year, followed by financials, telecommunications and industrials.
A Morgan Stanley gauge of U.S. cyclical stocks has outperformed the S&P 500 Index by about 18 percentage points in total return over the last year, according to data compiled by Bloomberg. A similar measure for Europe from Stoxx has performed just as well against its regional benchmark.
While the current rally in cyclical sectors since November has a “strong whiff of a ‘dash to trash’” given the quality of the companies, the pandemic could force some profound changes on industries -- especially financials and energy -- that could also spur more long-term gains, according to Nicholas Colas, co-founder of DataTrek Research.
“Some cyclical industries may be so different post-pandemic that they could see multi-year outperformance,” he said.
For example, energy companies need to cut costs to address structural challenges related to carbon-based energy demand, while financials are still too tied to human infrastructure to compete with technology-based rivals, Colas said.
“There’s a lot more going on under the surface,” wrote Colas. “We still like cyclicals.”
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