Market Overview

JPMorgan says stocks in these sectors will lead markets higher as economy recovers

Investment bank JPMorgan expects cyclical stocks to lead the market higher in the medium- to long-term as the business cycle improves. “You’re going to see cyclicals and more defensive names continue the rally after we get past this period of adjustment,” said James Sullivan, head of Asia ex-Japan equity research at JPMorgan.

Cyclical stocks are companies whose underlying businesses tend to follow the economic cycle of expansion and recession. Some of these include sectors such as finance, energy and industrial. Defensive stocks — such as health care and consumer staples — typically provide consistent earnings and dividends regardless of stock market conditions.

Global stock markets wobbled in recent weeks as bond yields rose, driven by optimism in the vaccine rollout for Covid-19 and the resumption of consumption spending. The move fueled expectations of higher inflation and investors worried it would prompt central banks to raise interest rates. Higher interest rates can knock down stocks with relatively high valuations.

Interest rates concerns also accelerated a market rotation — as investors took money out of expensive tech and growth stocks and put them into other cyclical sectors such as finance, energy and industrial. Stocks have rebounded in recent sessions but analysts still expect market conditions to remain volatile.

Steepening of the yield curve is positive for the overall profitability of large financial institutions, Sullivan explained, adding that the investment bank is overweight for both the banking and insurance sectors. Financial companies typically benefit from rising interest rates as it expands their profit margin. A steepening yield curve occurs when rates for longer dated bonds rise faster than interest rates for shorter dated bonds and typically indicates that investors expect rising inflation and stronger economic growth.

JPMorgan says stocks in these sectors will lead markets higher as economy recovers, CNBC, Mar 12

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