/As cyclical stocks rebound, investors eyeing whether their earnings comeback will justify the move

As cyclical stocks rebound, investors eyeing whether their earnings comeback will justify the move

Caterpillar Inc. excavators are displayed for sale at the Whayne Supply Co. dealership in Louisville, Kentucky, U.S., on Monday, Jan. 27, 2020.
Luke Sharrett | Bloomberg | Getty Images

This week, investors shifted money away from high-flying tech stocks, and into beaten-down groups like energy, industrials and real estate. These sectors, which are more sensitive to economic cycles, jumped after promising coronavirus vaccine news from Pfizer and BioNtech on Monday raised hopes for an economic reopening.

The cyclical stocks have been beaten down this year amid the pandemic. Energy, industrials and real estate are the only three sectors trading lower in 2020, while sectors that are generally less dependent on economic conditions, like technology, have fared better. Technology is trading up more than 32% this year.

As investors continue to grow more optimistic about an economic recovery in 2021, energy, real estate and industrials may look like an attractive bet based on earnings expectations. The group is expected to deliver a surge in profit growth next year, according to Jonathan Golub at Credit Suisse. The firm projects that cyclical sectors will report more than 65% earnings growth next year, which is significantly higher than estimates for the broader S&P 500.

To be sure for investors, the circumstances may not look as bright for the cyclicals if earnings from 2020 are taken into account. Golub says that “while pro-cyclical stocks are expected to deliver stronger EPS growth in 2021, the 2-year compound annual growth rate substantially favors secular winners.” When EPS growth from 2020 is factored in, cyclical sectors’ earnings are expected to decline by 7.2% on average, while the tech is set to grow by 10.6%.

Cyclical sectors’ profits took a large hit amid the pandemic, as travel and in-person work slowed to a near halt. Investors may still be weighing how much to trust the anticipated snapback in these profits in 2021. On Wednesday, technology reclaimed its spot as the market leader, while the cyclical sectors closed in the red.

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