Three reasons to prepare for a resumption of the rotation into cyclicals – UBS

Economists at UBS see several reasons investors should prepare for a resumption of the rotation into cyclicals that took place earlier this year and consider rebalancing their portfolios after the rally in mega-tech stocks. 

See – S&P 500: Boom economic conditions, better or worse matters more than good or bad – Charles Schwab

Investors should be careful to avoid overallocation to mega-cap tech companies

“Catalysts for further mega-cap gains appear less obvious. More investor visibility on mega-cap share buyback plans may offer some near-term support, and companies are likely to use any share pullbacks as an opportunity to repurchase shares. However, we appear to be entering a less compelling quarter for mega-cap tech with limited product refreshes and upgrade cycles until the ramp-up into the year-end holiday season. More demanding YoY growth comparisons may also limit the scope for major earning beats into the second half.”

“The tactical outlook favors the reflation trade. Part of tech’s surprising resilience in the first quarter can be attributed to reopening setbacks, while a pause in the rise of US Treasury yields has lent support in recent weeks. But we don't expect either trend to extend further into the second quarter as vaccination progress, fiscal spending, and pent-up demand give a fresh boost to cyclical sectors such as financials and energy. In addition, the earnings outlook for cyclical and value sectors appears more reliable on the back of recovering growth compared with the high bar mega-cap tech firms will face as one-off pandemic drivers fade.”

“Growth and regulatory outlooks support a rotation within tech, too. As the growth outlook for mega-cap tech normalizes toward more incremental gains, we expect markets to seek out the strong long-run growth outlook offered by earlier-stage small- and mid-cap tech companies. A more combative US regulatory outlook may be another driver. While regulatory impacts tend to be transitory, any short-term hit to dominant tech firms could lead to mid and small-cap tech firms outperforming.”