(Bloomberg) -- Equities linked to economic growth are roundly beating those seen as less sensitive, and the crowded trade still has a bit to go, according to JPMorgan Chase & Co (NYSE:JPM).
The strategy of going long cyclicals and short defensives hasn’t yet peaked, but “we are getting close,” the bank’s equity strategists led by Mislav Matejka wrote in a note Monday, highlighting a strong relative performance in both Europe and the U.S. this year. Notwithstanding this month’s global selloff, sectors including information technology, materials and consumer discretionary have outperformed peers in real estate, consumer staples and utilities in 2018.
After beating defensive shares in the last couple of years, relative valuations of cyclicals are looking stretched, while economic output momentum has probably peaked -- a sign that stocks more sensitive to growth may start to lag, the strategists say. On the plus side, they note that earnings remain constructive, with revisions proving better for cyclicals. Rising bond yields, closely watched by equity investors this year, is another favorable factor.
“Bond yield direction is a very important consideration for the trade,” the strategists wrote. “Cyclicals look much better than defensives in the backdrop of yields continuing to move higher, which remains our view.”
JPMorgan says it will keep its preference for cyclicals over defensives unless bond yields “exhaust their upward momentum” and activity indicators dip more sharply.