As cyclical shares rebound, traders are questioning if their earnings comeback will warrant the transfer
Caterpillar Inc. excavators will go on sale Monday, January 27, 2020 at the Whayne Supply Co. dealer in Louisville, Kentucky, USA.
Luke Sharrett | Bloomberg | Getty Images
This week investors have shifted money away from soaring tech stocks and into rundown groups like energy, industrial and real estate. Those sectors, which are more sensitive to economic cycles, jumped after promising coronavirus vaccine news from Pfizer and BioNtech on Monday raised hopes of an economic reopening.
Cyclical stocks were put down this year amid the pandemic. Energy, industry, and real estate are the only three sectors that are less traded in 2020, while sectors that are generally less dependent on economic conditions, like technology, do better. Technology is increasing more than 32% this year.
As investors continue to be more optimistic about an economic recovery in 2021, energy, real estate and industrials could look like an attractive bet on earnings expectations. Credit Suisse's Jonathan Golub says the group is expected to see a surge in earnings growth over the next year. The company expects cyclical sectors to see earnings growth of more than 65% over the next year, well above estimates for the broader S&P 500.
For investors, the cyclicals may not look so good given the 2020 gains. Says Golub, "While procyclical stocks are expected to see stronger EPS growth in 2021, the 2-year compound annual growth rate greatly favors worldly winners." Factoring in EPS growth from 2020 onwards, cyclical sectors earnings are expected to decline 7.2% on average, while technology will grow 10.6%.
The cyclical sectors' earnings were hit hard in the pandemic as travel and personal work nearly came to a halt. Investors may still be weighing how much they can trust the expected setback of those gains in 2021. Technology regained its place as market leader on Wednesday as cyclical sectors closed in the red.