Poke around the stock market right now and you may be surprised that some very well-known cyclical companies are seeing their stocks resting at 52-week highs despite an economic slowdown and troubles in the banking system that erupted in March.
This week has brought with it fresh 52-week highs for AutoZone (AZO), Booking Holdings (BKNG), Clorox (CLX), Coty (COTY), Decker’s Outdoor (DECK), ELF Cosmetics (ELF), General Electric (GE), Lennar (LEN), McDonald’s (MCD), Oracle (ORCL), and Nvidia (NVDA).
These companies do everything from selling lavish vacation packages to travel-goers (Booking) to big-ticket industrial equipment to airplane companies (GE) to Ugg boots to 20 somethings (Decker’s). Specifically, they are cyclicals whose fundamental financial fortunes are levered to an economic outlook that is mixed at best this year, recessionary at worst.
So what gives with this otherwise bizarre bullish stock price action?
Wall Street veterans explain to Yahoo Finance the upbeat sentiment in the cyclicals reflects a smattering of factors.
“The belief is that a [interest rate hike] pause by the Fed will be enough to save the day,” Miller Tabak chief markets strategist Matt Maley told us when asked about the main driver behind the rallies.
A pause by the Fed on rate increases would serve as point of relief for an economy that has cooled at the hands of aggressive rate hikes since 2022. In such an economic relief backdrop in the second half of the year, cyclical companies could experience an uptick in their sales and profits.
Investors are likely buying these stocks in advance of that happening, pros contend.
Sevens Report Research Founder Tom Essaye agrees with the Fed pause narrative fueling stocks but thinks there are also other elements in play.
“Market pros expect stocks to drop,” Essaye says. “That means the ‘pain trade’ is higher in the short term, as under allocated advisors and investors begrudgingly chase stocks.”
That lack of belief in stocks is on display in the latest Bank of America fund manager survey, which showed an outsized 29% of respondents are underweight stocks.
By being underweight stocks, large investors are saying they are bearish on risk. But if stocks are on a steady climb as they are now, these same large investors could be forced to buy stocks as to avoid underperforming.
The process feeds on itself, sending stock prices higher — especially cyclical names that tend to do well at the start of an economic re-acceleration.
Essaye added that stocks are also eating up the narrative of the economic slowdown being short in duration due to a more sound financial system.
“We are exiting a period of historically massive economic stimulus,” Essaye said. “That makes this very different from the past two economic slowdowns, as they were caused by asset bubbles popping (tech stocks/houses). That implosion of those asset values created the slowdowns. However, this time there was no asset bubble.”
Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations or anything else? Email [email protected]
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