Cyclical stocks: What they are and why they matter to investors

Key takeaways:

• Cyclical stocks are shares in companies whose revenues, earnings and prices tend to move with the economic cycle, often strengthening in expansions and weakening in downturns.
• Types of cyclical stocks include consumer cyclical, industrial, technology, financial, commodity and transportation stocks, each responding differently to spending, investment and demand.
• Some investors consider cyclical stocks for exposure to recoveries, expansions and sector-specific growth, but timing is difficult and outcomes depend on valuation, earnings and market conditions.
• Cyclical vs non-cyclical stocks is a key distinction: defensive sectors such as utilities, staples and healthcare may be less sensitive to economic cycles, though they can still fall in value.
• Combining cyclical and non-cyclical stocks may help manage concentration risk, but diversification does not remove market risk or guarantee smoother returns.

Cyclical stocks play a significant role in the financial markets, reflecting the ups and downs of the broader economy. These stocks often perform better during economic expansions and can come under pressure during downturns, although outcomes vary by company, sector and market conditions. For investors, understanding the behaviour of cyclical stocks can be useful when assessing how different sectors may respond to changing economic conditions.

In this guide, we'll examine what cyclical stocks are, identify their different types, and discuss why you might consider them as part of a diversified portfolio.

Additionally, we’ll highlight a few key examples of cyclical stocks, not as investment recommendations, but to illustrate the kinds of companies that typically fall into this category.

What are cyclical stocks?

Cyclical stocks are shares of companies whose performance is closely tied to the overall economic cycle. These stocks often perform better during periods of economic expansion and are more vulnerable during recessions or slowdowns.

The reason behind this fluctuation is that demand for many cyclical businesses is sensitive to consumer discretionary spending and/or business investment, which tends to change with economic conditions—things people are more likely to buy when they have extra disposable income.

Cyclical stocks are often found in industries like automotive, construction, luxury goods, and travel. That's because when the economy is strong, consumers may be more likely to purchase new cars, invest in home renovations, and spend on vacations, which can support revenues in these sectors.

Conversely, during economic downturns, these discretionary expenditures may be cut, which can put pressure on revenues, earnings and share prices.

Types of cyclical stocks

Cyclical stocks can be categorised into several types based on the industries they belong to. Here are the most common ones:

1. Consumer cyclical stocks

These stocks represent companies that sell non-essential consumer goods and services. The performance of these companies is closely tied to consumer spending, which tends to increase during economic expansions and decrease during downturns.

Examples (illustrative only):

• Automotive. Volkswagen and Ford, whose sales can be sensitive to consumer confidence, financing conditions and demand for new vehicles.
• Luxury goods. LVMH, known for brands like Louis Vuitton and Moët Hennessy, and Hermès, both of which can be sensitive to discretionary spending on luxury items.
• Entertainment and leisure. Walt Disney and other listed leisure and entertainment companies, where revenue can be influenced by consumer spending on travel, leisure activities and theme parks.

2. Industrial cyclical stocks

These companies are involved in sectors like manufacturing, construction, and infrastructure. Their performance can be stronger during periods of economic growth when demand for capital goods and construction projects increases.

Examples (illustrative only):

• Construction equipment. Caterpillar and Komatsu, which produce heavy machinery and industrial equipment used in construction and infrastructure projects.
• Aerospace manufacturing. Airbus and Boeing, where demand for commercial aircraft can be influenced by airline profitability, travel demand, financing conditions and wider economic growth.

3. Technology cyclical stocks

While some technology companies are considered stable, those producing consumer electronics or enterprise software often experience cyclical demand. Their revenues can fluctuate significantly based on business and consumer spending.

Examples (illustrative only):

• Semiconductors. ASML Holding and Intel, where demand can be influenced by business investment, consumer electronics cycles and broader economic conditions.
• Consumer electronics. Apple and other listed consumer electronics companies can see demand affected by consumer replacement cycles, discretionary spending and economic conditions.

4. Financial cyclical stocks

Many financial institutions, including banks and insurance companies, have cyclical characteristics because their profits can be influenced by economic conditions, interest rates, credit demand and asset markets.

Examples (illustrative only):

• Banks. HSBC and BNP Paribas, whose earnings can be influenced by lending activity, credit quality, interest rates and economic conditions.
• Insurance. AXA and Prudential, where demand for certain insurance products can fluctuate with economic conditions.

5. Commodity cyclical stocks

Companies that deal with commodities like oil, gas, and metals often see their performance fluctuate with economic activity. Commodity prices can be susceptible to changes in global demand.

Examples (illustrative only):

• Oil and gas. Shell plc and ExxonMobil, where revenues can be influenced by oil and gas prices, which depend on global demand, supply conditions and geopolitical factors.
• Mining. Rio Tinto and Glencore, both of which are affected by global demand for raw materials.

6. Transportation cyclical stocks

These companies provide transportation services like airlines, shipping, and railroads. Their performance is closely linked to economic activity, as demand for transportation rises and falls with the economy.

Examples (illustrative only):

• Airlines. Lufthansa and Delta Air lines, where ticket sales can be sensitive to economic cycles, fuel costs, travel demand and capacity.
• Shipping and logistics. Maersk and UPS, where demand for transport and logistics services can fluctuate with global trade activity.

Each of these categories can react differently to economic cycles. For example, consumer cyclical stocks may be more sensitive to household spending, while industrial cyclical stocks may be influenced by business investment and d infrastructure spending.