Cyclical Stocks: Investment Strategies for 2026 and What Investors Should Know

By 2025, it has proven that cyclical stocks are a key mechanism for wealth creation for those who understand their nature correctly. Many investors tend to chase growth stocks but miss out on significant profit opportunities from cyclical stocks that rotate with the economic cycle during the global economic recovery. If your portfolio still lacks cyclical stocks, it may be a sign that you’re missing out on opportunities.

What Are Cyclical Stocks? Basic Understanding Every Investor Must Have

Cyclical stocks are shares of companies whose revenues and profits fluctuate according to the economic cycle. The term “cyclical” comes from their characteristic of profit and price movements that rise and fall in cycles, following changes in supply and demand.

The distinctive feature of cyclical stocks is their movement closely linked to the overall economy. When the economy is strong and growing, these companies’ profits tend to soar. When the economy slows down, profits plummet rapidly.

Economic Cycles and Cyclical Stocks: The Relationship Investors Must Know

To better understand cyclical stocks, consider the four phases of the economic cycle:

👉 Recovery Phase: The economy begins to show signs of expansion. Cyclical stocks start receiving new orders, demand for goods increases, profits rise, and stock prices surge.

👉 Peak Phase: The economy reaches its highest growth point. Cyclical stocks see profits increase, but signs of plateauing in stock prices appear.

👉 Recession Phase: The economy enters a slowdown. Demand decreases, companies cut spending and halt new investments, and stock prices fall rapidly.

👉 Trough Phase: The economy is at its worst. Company profits may turn into losses. This is a golden opportunity for long-term investors who see the big picture.

Industries with Clear Cyclical Stocks

Cyclical stocks are present across various industries, with prices changing in tandem with economic cycles:

Shipping and Maritime Transport: Businesses involved in global freight depend on international trade volume. During prosperity, demand for shipping skyrockets; during downturns, it declines.

Petrochemical and Oil Refining: Oil prices and energy demand fluctuate with economic changes.

Agricultural Products: Demand for food and raw agricultural materials varies with consumers’ purchasing power.

Steel Industry: Steel demand depends on construction projects and manufacturing activity.

6 Cyclical Stocks Performing Well in 2025 and Continuing into 2026

1. Nvidia (NVDA) – Leader in AI Chips Industry

Nvidia has shown excellent performance throughout 2025, driven by relentless demand for AI chips. The company dominates over 80% of the AI chip market, with profit growth at 35%. Its P/E ratio is around 40, with a PEG ratio of about 1.2, indicating a balance between valuation and growth potential. Nvidia holds over $20 billion in cash and nearly zero debt, ensuring stability. For 2026, AI investments are expected to remain a key focus.

2. Caterpillar (CAT) – Construction Equipment Giant

Caterpillar benefits fully from global infrastructure investment plans, especially the $1.2 trillion Infrastructure Bill. In 2025, revenue grew by 8-10% from markets in Asia and South America. With a P/E of only 15 and a backlog of $30 billion, CAT remains highly secure. It has paid dividends for over 25 years, providing steady income for investors.

3. JPMorgan Chase (JPM) – Major U.S. Bank

JPMorgan benefits from declining interest rates in late 2025, with the Fed expected to cut rates 3-4 times in 2026. This boosts business lending and profits by about 11%. Trading at a Price-to-Book ratio of approximately 1.8, the bank is undervalued with a high ROE of 16% and strong CET1 capital ratio of 14.5%.

4. ArcelorMittal (MT) – Global Steel Producer

ArcelorMittal achieved excellent results in 2025, with steel prices rising 15-20% due to worldwide infrastructure investments. Its P/E is very low at 5, with a Free Cash Flow Yield of 15%, enabling share buybacks and consistent dividends. The company is also investing in green steel to reduce CO2 emissions, aligning with ESG trends.

5. LVMH (LVMUY) – Global Luxury Goods Empire

LVMH, with over 75 brands including Louis Vuitton and Dior, recorded outstanding results in 2025. Wealthy consumers’ spending remains strong even during economic slowdowns, and China’s economic recovery boosted luxury sales. With a gross margin of 65%, well above industry average, LVMH demonstrates resilience. Founder Bernard Arnault owns over 40%, reflecting high confidence.

6. Lennar Corporation (LEN) – U.S. Homebuilder

Lennar benefits from lower mortgage rates below 5.5% in 2025. The aging of Millennials entering the first-time homebuyer phase increases demand for new homes. LEN has a P/E of only 10, below industry average, with land reserves over 300,000 plots bought at low prices during market downturns. With a 21% profit margin and 15% faster construction efficiency than competitors, LEN is an attractive choice.

Other Cyclical Industries to Watch in 2026

Semiconductor Industry: Following 2025, stocks like ASML Holding, MediaTek, SK Hynix, and Qualcomm are expected to continue high growth. Experts forecast a 15% growth in the semiconductor market in 2026, driven by AI investments and supply chain restructuring.

Automotive Industry: Companies like Volkswagen, Hyundai, BMW, and BYD benefit from the cyclical renewal of vehicle purchases. Global car sales are projected to increase by 8% in 2026.

Banking Sector: Besides JPMorgan, Goldman Sachs and Bank of America are expected to grow during the economic recovery, aided by rate cuts and increased lending.

Risks and Special Characteristics of Investing in Cyclical Stocks

Key Features Investors Must Understand

High Volatility: Cyclical stocks often experience sharp price swings in short periods, offering profit opportunities but also high risks.

Linked to Economic Conditions: Their prices directly depend on the economic cycle. When the economy is strong, prices rise; during downturns, they fall quickly.

External Risks: Government policies, global financial conditions, exchange rate changes, or worldwide crises can significantly impact prices.

Advantages of Investing in Cyclical Stocks

✅ High Profit Potential: The high volatility creates opportunities for substantial short-term gains.

✅ Economic Cycle Insight: Understanding cycles allows investors to predict trends and buy at optimal points.

✅ Portfolio Diversification: Combining cyclical stocks with other types helps build a balanced, risk-reduced portfolio.

Disadvantages of Investing in Cyclical Stocks

❌ High Volatility Risks: Investors intolerant to short-term fluctuations may suffer losses.

❌ Requires Analytical Skills: Deep understanding of economic indicators and financial analysis is necessary.

❌ External Risks: Unexpected global events like environmental issues, trade policies, or crises can cause significant impacts.

❌ Not Suitable for Long-Term Investment: Cyclical stocks often produce unstable returns over the long run due to their volatility.

Difference Between Cyclical Stocks and Defensive (Non-cyclical) Stocks

Defensive stocks or non-cyclical stocks are the opposite of cyclical stocks. These companies produce goods and services with steady demand regardless of economic conditions.

Examples of Defensive Stocks:

• Coca-Cola: Beverage company with consistent demand even during downturns.
• Johnson & Johnson (JNJ): Healthcare and essential medicines.
• Tesco: Grocery retailer providing essential food.
• NextEra Energy: Utility company with stable energy demand.

While cyclical stocks offer high profit potential, defensive stocks provide stability and security for long-term investors. Smart investors often blend both to achieve a balanced portfolio.

Summary: Investing in Cyclical Stocks Requires Real Economic Understanding

Investing in cyclical stocks is not for beginners. It demands deep knowledge of economic cycles, market conditions, and risk management.

Successful investors understand the relationship between business cycles, seasons, and supply-demand factors. By studying how businesses relate to economic conditions, they can plan optimal buy and sell points, reducing risks from ignorance.

In 2026, if the global economy continues to recover, cyclical stocks still hold high potential. This is the best opportunity for investors willing to study and truly understand economic cycles.