JPMorgan Says Cyclical Stocks May Drive Rally Through Year’s End

JPMorgan Chase & Co. listed Ford Motor Co. and Southwest Airlines Co. as among 24 low-priced cyclical stocks that may lure investors by year-end.

Improved 2011 earnings estimates and attractive valuations may help cyclical companies, which are more sensitive to economic growth, outperform versus so-called defensive stocks, according to Thomas Lee, the firm’s chief U.S. equity strategist. Stocks priced below $22 a share have trailed gains by the broader equity markets and may begin to rally in the next three months, he said.

“There is a strong and intuitive relationship between economic momentum and cyclical outperformance,” Lee wrote in a research note today. “The improved tone of equity markets in recent weeks is notable.”

The Standard & Poor’s 500 Index has climbed 7.2 percent in September through yesterday as improved economic data has bolstered optimism in the economic recovery. The benchmark for U.S. equities was still 7.6 percent below this year’s high in April, after falling on concern that American unemployment and widening budget deficits in Europe would derail global growth.

US Airways Group Inc., CBS Corp. and Macy’s Inc. are among the companies with the highest market capitalizations listed in the group. Lee selected the 24 cyclical, high-beta companies with 2011 earnings forecasts that have been raised by analysts since April, shares priced less than $22 and market capitalization greater than $1 billion.

High-beta stocks move the most relative to benchmark indexes.

The S&P 500’s rally may continue based on the index’s performance in midterm election years, according to Lee. Equities have risen from mid-September to year-end in 21 of the past 28 midterm election years. Lee’s forecast for where the S&P 500 will be at the end of the year is 1,300, the highest of the 11 strategists who gave an estimate in a survey by Bloomberg.

“History strongly favors equities to outperform in the fourth quarter,” Lee said. “Given the mixed performance of many asset managers year-to-date, this suggests we should see performance chasing this year.”

To contact the reporter on this story: Inyoung Hwang at ihwang7@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

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