Nvidia shares pop as analysts dismiss AI bubble concerns
Investing.com -- Cyclical stocks in the S&P 500 have fallen sharply in recent weeks, but the scale of the decline appears exaggerated, according to new analysis from Capital Economics.
James Reilly, a senior markets economist at Capital Economics, said “weakness in cyclicals looks overdone” and argued there is room for a rebound even without any renewed surge in AI-driven market enthusiasm.
The economist noted that cyclical stocks have “underperformed ‘defensive’ ones markedly over the past couple of weeks, even after stripping away the influence of tech firms.”
In fact, the underperformance is now “among the most acute since the GFC.”
While the information technology and health care sectors dominate the standard cyclical and defensive indices, making up about half of each, the firm stressed that the pattern persists even when adjusting the index methodology.
Constructing alternative versions of cyclical and defensive indices, including those with equal sector weights and versions that exclude tech and energy altogether, generated “similar results.”
Capital Economics said this highlights that the downturn is broad-based rather than driven by a handful of large names.
This breadth is said to be visible in the proportion of declining stocks: “~70% of S&P 500 cyclical stocks have fallen in price compared to ~30% of defensive ones.”
The gap, it added, is “around its widest since 2010.”
Yet the wider market backdrop does not support a major flight to safety, according to Reilly.
He pointed out that “US investment-grade corporate bond spreads have barely risen, Treasuries have not rallied, and safe-haven currencies… have hardly outperformed.”
With economic data offering little justification for such a sharp rotation, the firm expects “some of this shift from cyclicals to defensives may soon reverse.”
Capital Economics added that cyclical stocks should receive additional support from “stronger-than-expected US economic growth over the coming year and growing AI hype.”