Cyclical stocks have recently soared past those considered defensive in this year’s market rally, as investors in exchange-traded funds last month showed a penchant for cyclical sectors.
“We believe the bulk of this cyclical rally is behind us,” Goldman Sachs Group analysts said in a portfolio strategy research note published Aug. 1 after the U.S. stock market’s close. “Cyclical rotations as sharp as the one that began in May are rare.” “Ultimately, the forward path of economic growth will determine whether cyclicals have more room to run,” the analysts said. Their research found that “when growth decelerated after sharp cyclical rallies, defensives began to outperform,” with the analysts cautioning that Goldman’s economists forecast that growth will decelerate to 1.6% in the third quarter on an annualized basis before slowing to 1.1% in the fourth quarter.
ETF flows Meanwhile, investors in equity ETFs favored cyclicals in July, as sector flows underscored their appetite for risk-taking in markets, according to Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors. “The strong flows were led by cyclicals, as those market exposures took in almost $8 billion while defensives had outflows,” he said. “Cyclicals have now outpaced defensives for two consecutive months.”
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