As Wall Street continues to break records, the players have been changing. Value-oriented stocks and defensives had been leaders in the bull market, but recently money has been moving into cyclical stocks — technology, financials and energy.
To many, this is a healthy sign for a bull market as investors look increasingly willing to take risks. (Read: Stocks begin a new chapter in this bull market).

“It looks like the bullish trend is alive and we’re continuing to see the great mini-rotation continue within the market, which is very healthy and as long as leadership continues to show up, the bulls clearly remain in control of this market,” said Adam Sarhan, chief executive of Sarhan Capital.

But does this rally really need these leaders to keep going? In a note dated May 8, Dominic Wilson, chief market economist of Global Investment at Goldman Sachs, says equities could keep the rally going without any strong cyclical leadership, such as what was seen in the mid-1990s.

“In particular, if non-U.S. growth remained weak, yields might stay lower for longer. In that case, despite a U.S. recovery, it is plausible that the S&P 500 SPX multiple could rise further, potentially pushing the index beyond 2,000. Our conviction that the U.S. market will climb further is thus higher than our conviction about which sectors will lead it there.”

Wilson notes that many are puzzled by the fact the stock rally has been paired with soft data and underperforming cyclicals — at least until recently — but he says that mystery is a bit exaggerated.

“A post-bust recovery, weakness in non-U.S. growth and falling yields have all helped this pattern since mid-2011. Global data has decelerated, while G4 monetary policy has eased again.”

The case for U.S. equities now is not primarily about strong global growth, nor even strong U.S. growth says Goldman’s Wilson.

“It is mostly about the normalization of the U.S. growth recovery in an environment where the spread between yields on equities and the risk-free rate is unusually large. Our central forecasts are that this gap will close from both sides, with equities rising further and bond yields rising gradually too.

He also reiterated Goldman’s view, as of a few days ago, that cyclical underperformance should begin to reverse.
At Seeking Alpha, Scott Martindale made the point that even better for this stock market run is signs that investors seem to be “broadening into cyclical cycles rather than rotating.” Also check out: Cyclicals: Short-term trade or longer-term theme?
– Barbara Kollmeyer
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