Cyclical Stocks vs Non-Cyclical Stocks: How Can You Trade Them?

Not every stock is created equal. One of the biggest distinctions is cyclical vs non-cyclical—those that grow or decline alongside economic conditions and those that are less sensitive. In this article, we explore the key differences between the two, how to analyse both, and how to trade them.

What Are Cyclical Stocks?

Cyclical stocks are those that rise and fall in line with the broader economy. They’re more sensitive to consumer spending and include those in the travel, automotive, construction, and luxury goods sectors.

Simply put, when consumers have more disposable income, they’re likely to buy new cars, travel abroad, or invest in home improvements. Demand boosts corporate earnings and pushes share prices higher. However, when consumers have less money or face economic uncertainty, they reduce and delay spending on these discretionary purchases, dampening company earnings and stock valuations.

Nike and Starbucks are good examples here—both are cyclical companies that see higher demand when consumers are in a stronger financial position and feel comfortable purchasing brand-name clothes or buying coffee on the go.

Cyclical stocks tend to be more volatile than non-cyclical ones. Their sensitivity to cyclical business conditions offers potential opportunities for traders to capitalise on a growth phase, but timing matters—getting caught in a temporary or prolonged downturn can lead to sharp drawdowns.

Cyclical Sectors

• Automotive
• Airlines & Travel
• Luxury Goods & Apparel
• Construction & Materials
• Banking & Financial Services
• Technology & Semiconductors
• Restaurants & Entertainment
• Retail (Discretionary Spending)

Is Tesla a Cyclical Stock?

Yes, Tesla is a cyclical stock. Demand for electric vehicles moves in line with economic conditions, consumer spending, and interest rates.

Is Amazon a Cyclical Stock?

Amazon is partly cyclical. Its retail business depends on consumer spending but its cloud computing division (AWS) sees constant demand and provides diversification.

What Are Non-Cyclical Stocks?

Non-cyclical stocks belong to companies that sell essential goods and services. Contrasting with cyclical stocks and their sensitivity to consumer spending, non-cyclical companies sell things people buy regardless of economic conditions. They’re often referred to as defensive stocks because they tend to hold up when the economy weakens.

Non-cyclical sectors include healthcare, utilities, and consumer staples. Supermarkets, pharmaceutical companies, and electricity providers see relatively steady demand because people still need food, medicine, and power whether the economy is growing or contracting.

For example, consumer non-cyclical stocks, like Procter & Gamble, which owns brands like Oral-B, Charmin, and Gillette, continue to generate revenue year-round because consumers still buy everyday household items. The same goes for Johnson & Johnson, which sells medical products that hospitals and pharmacies need.

Compared to cyclical stocks, non-cyclical stocks are usually less volatile because their earnings are more consistent. While their potential returns are relatively limited vs their more growth-oriented cyclical counterparts, non-cyclical stocks are believed to not dive as sharply during a downturn.

Non-Cyclical Sectors

• Consumer Staples (Everyday Goods)
• Healthcare & Pharmaceuticals
• Utilities (Electricity, Water, Gas)
• Telecommunications
• Grocery & Essential Retail
• Defence & Aerospace

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How Traders Analyse Cyclical Stocks

In a market where going long or short volatile cyclical stocks is an option (such as with CFDs), many prefer to trade them over non-cyclical stocks. More broadly, traders analyse a few key indicators to determine whether cyclical stocks are in a growth phase.

Macroeconomic Indicators

When GDP expands, businesses and consumers spend more, and free-flowing spending boosts demand in cyclical sectors. Similarly, interest rates determine spending on more big-ticket purchases, like cars, homes, and luxury goods. Lower interest rates encourage borrowing and vice versa.

Employment rates also play a key role. More layoffs and a higher unemployment rate mean consumers dial back purchases of discretionary goods and services. Employment conditions, along with economic and policy uncertainty, drive consumer confidence. When optimism is high, cyclical stocks often rally.

Earnings Trends & Sector Data

Unlike non-cyclical companies, cyclical firms see earnings fluctuate based on economic cycles. Traders pay attention to quarterly reports and especially forward guidance. If a company expects strong sales growth due to rising demand, this can drive its stock price higher and possibly signal an upswing in the sector.

Industry-specific data, like auto sales figures or airline bookings, is also a useful gauge for assessing the future performance of a company.

Market Sentiment & Seasonal Trends

Cyclical stocks are prone to seasonal patterns—retailers surge in the holiday season, while travel stocks perform well in summer. Market sentiment is another important factor; for instance, if economic uncertainty is growing but investors on the whole believe it to be a temporary blip, then cyclical stocks may still rise.

Analysing Non-Cyclical Stocks

While traders often favour cyclical stocks for their higher potential returns, many still turn to non-cyclical companies as a possible form of short-term defence against downturns, to balance a long-term portfolio, or when unique occasions arise (earnings reports, company-specific news, etc.).

Earnings Stability & Cash Flow

Since non-cyclical companies sell essential goods and services, their earnings tend to be more consistent. Traders look at revenue trends, gross margins, and free cash flow to assess a firm’s ability to generate relatively steady income. Consistent earnings—even during downturns—can be a marker of a strong non-cyclical stock.

Dividend History & Payout Ratios

Many non-cyclical stocks pay dividends. That makes them attractive for those looking for income-generating assets. A company with a long track record of consistent or growing dividend payments is often a sign of financial strength. The payout ratio (dividends paid as a percentage of earnings) is another metric traders examine—too high, and it could indicate unsustainable distributions.

Market Conditions & Defensive Rotation

If economic uncertainty rises, investors will generally shift into defensive sectors like healthcare, utilities, and consumer staples. Many will monitor fund flows—where institutional money managing exchange-traded funds (ETFs), mutual funds, and large portfolios is headed—to understand if risk aversion is growing.

Likewise, outperformance in certain sectors can be a signal. If sector indices like the S&P 500 Consumer Staples Index or the S&P 500 Healthcare Index outperform the overall S&P 500, it may indicate capital moving into non-cyclical stocks.

Trading Cyclical and Non-Cyclical Stocks

Now, let’s take a closer look at how traders engage with these stocks.

Short-Term Trading

Short-term traders generally focus on stocks or sectors expected to move over hours or days. One strategy might be to examine the broader conditions and trade ahead of earnings reports. If summer is approaching and the economy is doing well, Delta Air Lines could rise in the weeks before an earnings release as traders anticipate strong quarterly performance and positive forward guidance.

Another strategy is trading macro themes. If inflation rises, traders might focus on companies with strong pricing power, like consumer staples firms that can pass costs onto consumers. If economic data points to a slowdown, they might focus on healthcare stocks.

Medium-Term Trading

Medium-term traders take a broader view and typically adjust their portfolio weightings based on economic conditions. During expansions, they may overweight cyclicals like construction and travel stocks, while shifting into non-cyclicals as recession risks grow. That could mean just rebalancing a collection of ETFs, over/under-weighting a set of stocks, or a mix of both.

Here, the focus is usually on broader economic trends while also staying alert for possible strengthening or weakening consumer demand.

Long-Term Trading

Long-term traders often hold a mix of cyclical and non-cyclical stocks to maintain a balanced portfolio across economic cycles. While they may still adjust weightings over time, they tend to be more concerned with long-term sector trends and income generation.

With a longer time horizon, these traders may be more willing to allocate more capital to cyclical stocks during a downturn, especially to otherwise strong companies or sectors, to take advantage of potential rebounds months down the line.

The Bottom Line

Understanding the difference between cyclical and non-cyclical stocks is fundamental to trading them. Careful analysis—macroeconomic, sectoral, and company-specific—can help traders identify potential opportunities across all time horizons. To get started trading cyclical and non-cyclical stock CFDs, consider opening an FXOpen account and take advantage of tight spreads alongside four advanced trading platforms.

FAQ

What Are Examples of Cyclical Stocks?

Cyclical stocks include Tesla (TSLA), Delta Air Lines (DAL), Nike (NKE), Caterpillar (CAT), Marriott International (MAR), and Ford (F).

Which Industries Are Most Cyclical?

Highly cyclical industries include automotive, airlines, hospitality, construction, luxury goods, and consumer discretionary retail.

Is Coca-Cola a Cyclical Stock?

No, Coca-Cola is considered a non-cyclical stock. Demand for its wide range of products remains stable regardless of economic conditions.

Is Starbucks a Cyclical Stock?

Yes, Starbucks is a cyclical stock. Coffee purchases aren’t essential, so demand fluctuates based on disposable income and consumer confidence.