Cyclical Stock
A stock whose performance is closely tied to the economic cycle, rising during expansions and falling during recessions.
What is Cyclical Stock?
A cyclical stock is a share of a company whose business performance rises and falls in tandem with the broader economic cycle. In periods of economic expansion, consumers and businesses spend more, boosting earnings for cyclical companies. When recessions hit, demand contracts sharply and earnings decline steeply. Classic cyclical sectors include automobiles, airlines, hotels, homebuilders, steel, energy, and luxury goods. Because their future earnings are tightly correlated with GDP growth, cyclical stocks are highly sensitive to interest rates, consumer confidence, and employment data. Investors often buy cyclicals early in an economic recovery and rotate into defensive sectors as growth peaks.
Example
Ford Motor Company's earnings follow a classic cyclical pattern. During the 2021–2022 economic recovery, Ford's profits surged as consumers bought vehicles after pandemic-era pent-up demand was released. Conversely, during the 2008–2009 recession, Ford's revenues collapsed, pushing the company to the brink of bankruptcy and demonstrating the vulnerability of cyclical companies to downturns.
Source: Investopedia — Cyclical Stock