Investing Through Market Cycles: Cyclical vs Defensive Stocks

Equity markets do not move in isolation. Corporate earnings, consumer behaviour, and investor sentiment are all shaped by the broader economic environment. As a result, most investment portfolios can be broadly categorised into two types of exposure: cyclical stocks and non-cyclical (defensive) stocks.

Economic activity typically progresses through four recurring phases: expansion, peak, contraction, and trough. Each stage impacts spending patterns, capital investment, and risk appetite differently. Understanding how specific stocks respond to these shifts is essential for managing risk and optimising returns across market conditions.

What Are Cyclical Stocks?

Cyclical stocks are shares of companies whose revenues and profitability are closely tied to economic growth. These businesses tend to perform strongly during periods of expansion, when employment is high, credit conditions are favourable, and consumers are willing to spend on non-essential goods and services.

However, during economic slowdowns or recessions, cyclical companies often experience declining demand, weaker margins, and increased earnings volatility. As a result, their share prices typically fluctuate more aggressively than the broader market.

Key Characteristics of Cyclical Stocks

Cyclical stocks are generally more volatile and highly sensitive to macroeconomic indicators such as GDP growth, interest rates, inflation, and consumer confidence. Their earnings per share (EPS) often rise sharply during upswings and contract just as quickly during downturns.

Valuation metrics such as the price-to-earnings (P/E) ratio can be misleading at different points in the cycle. A low P/E may reflect peak earnings rather than genuine undervaluation, which is why cyclical stocks require careful timing and analysis.

Examples of Cyclical Sectors and Stocks

Travel, Airlines, and Leisure

Travel and leisure are among the most economically sensitive industries. During periods of prosperity, consumers allocate more disposable income to flights, holidays, hotels, and dining. When economic uncertainty rises, these expenditures are often the first to be reduced.

Examples of cyclical airline and aerospace stocks include Boeing (BA), Delta Air Lines (DAL), and United Airlines (UAL).
In the broader leisure segment, companies such as Expedia Group (EXPE), Hyatt Hotels (H), and Texas Roadhouse (TXRH) exhibit similar cyclical characteristics.

Textile and Apparel

The textile and apparel sector is highly dependent on disposable income and consumer sentiment. Strong economic conditions typically support higher spending on clothing and premium brands, while weaker conditions lead consumers to delay purchases or trade down.

Representative cyclical stocks in this segment include Capri (CPRI), Culp (CLP), Levi Strauss (LEVI), Lululemon Athletica (LULU), Hanesbrands (HBI), and Tapestry (TPR).

What Are Non-Cyclical Stocks?

Non-cyclical stocks, also known as defensive stocks, belong to companies whose business activity remains relatively stable regardless of economic conditions. These firms provide essential goods and services that consumers continue to demand even during recessions.

Because revenues are less sensitive to economic fluctuations, non-cyclical stocks typically exhibit lower volatility and more predictable earnings, making them an important component of risk-managed portfolios.

Examples of Non-Cyclical Sectors and Stocks

Food and Beverages

Demand for food and beverages remains consistent across economic cycles. As a result, companies in this sector often generate stable cash flows and maintain dividend payments even during downturns.

Examples include Campbell Soup (CPB), Coca-Cola (KO), and Kraft Heinz (KHC).

Health Care

Health care spending is largely non-discretionary. Consumers do not postpone medical treatment or essential pharmaceuticals due to economic conditions, making this sector inherently defensive.

Examples include Pfizer (PFE), Johnson & Johnson (JNJ), and Merck (MRK).

Residential REITs

Housing is a basic necessity, which gives residential-focused real estate companies a more defensive profile compared to commercial property. While valuations may fluctuate, long-term demand for shelter remains intact.

Examples include:

• AvalonBay Communities (AVB) – U.S. multifamily apartments
• Equity Residential (EQR) – Large-scale residential rental properties
• Essex Property Trust (ESS) – West Coast residential real estate

Utilities

Utilities represent one of the clearest examples of non-cyclical stocks. Consumers and businesses continue to pay for electricity, water, and gas regardless of economic conditions.

Defensive utility stocks include American Water Works (AWK) and UGI (UGI).

Cyclical vs Non-Cyclical Stocks: Strategic Portfolio Implications

Cyclical stocks tend to outperform during economic expansions, as rising consumer demand, business investment, and improving macro conditions support revenue and earnings growth. However, this higher growth potential comes with increased sensitivity to economic slowdowns, making cyclical stocks more volatile during periods of recession or market uncertainty.

Non-cyclical (defensive) stocks, on the other hand, provide stability across economic cycles, as demand for their products and services remains relatively consistent regardless of economic conditions. By combining cyclical exposure for growth with non-cyclical holdings for risk mitigation, long-term portfolios can achieve a more balanced return profile, allowing investors to participate in upswings while maintaining resilience during market downturns.

Conclusion

Understanding the distinction between cyclical and non-cyclical stocks is fundamental to navigating changing economic conditions. By aligning sector exposure with risk tolerance and investment objectives, investors can build portfolios that are better positioned to perform across the full economic cycle.

At OnEquity, we view this balance not as market timing, but as disciplined diversification, designed to support consistency, resilience, and long-term capital growth.

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