• Cyclical shares drive market as tech, consumer stocks gain
  • Goldman points out post-Brexit defensive rally in reverse

The high-defense, low-volatility stock cabal whose leadership has defined the rally of 2016 is beginning to see its influence wane.

For the first time in two months, it’s been technology and commodity stocks -- not utilities or household goods makers -- that have led the S&P 500 Index as it climbed in the 12 days since since earnings season began. Computer and software companies were the best group in the five days that just ended, too, powering the benchmark gauge for American equity to a record and its fourth straight weekly advance.

Gains of 15 percent or more in companies like EBay Inc. and Chesapeake Energy Corp. warmed the hearts of bulls looking for evidence that it’s more than just low bond yields behind equities’ strength, particularly as corporate results are reported. The advances came as S&P 500 companies showed signs of breaking a four-quarter-long decline in sales, fueling optimism that a long-awaited rebound in earnings is at hand.

“The economic data we’re seeing from the U.S. has contributed a lot and has fortified the belief that the market can hold itself,” said Bill Schultz, who oversees $1.2 billion as chief investment officer at McQueen, Ball & Associates Inc. in Bethlehem, Pennsylvania. “Earnings season is bringing out a bit more optimism and that’s taking us away from those defensive names that we saw move earlier post-Brexit.”

The S&P 500 rose 0.6 percent in the week, as U.S. stocks paced gains amid mixed global equity markets. An MSCI World Index of stocks has added 1.3 percent since the U.K.’s secession vote in June.

Slow and steady won the race for the S&P 500 this week as a rise in takeover activity and economic data that was largely in line with Wall Street’s expectations made for modest moves and muted trading.

Technology companies added 2 percent in the week, extending gains since June 27 to 11 percent. The Nasdaq Composite Index is now 2.3 percent below its all-time high reached one year ago as it’s surged an equal amount since then. Consumer-discretionary shares added 8.2 percent since June 27, while banks rose 9.5 percent.

Some say the recent gains in cyclical shares -- those that fare better against a strengthening economic backdrop -- aren’t a surefire referendum on the U.S. economy. The shift in sentiment may be little more than a reversal of the defensive-led rally that underpinned equity market gains throughout 2016, according to Goldman Sachs Group Inc.

New highs in the S&P 500 are still being spurred by investors fleeing the bond market’s paltry yields, more than expectations for growth in the U.S economy, Charles Himmelberg, partner and chief credit strategist at Goldman, said in a July 21 note to clients. The cyclical rally is probably a brief mean reversion attributable to the outsize moves in defensive stocks and may not last, he wrote.

“If you look at the tech, financial and health-care stocks, they’ve been obliterated, some of the poorest performers in the first quarter of this year, so I’d expect a rebound,” Scott Colyer. “Those sectors rallying is one thing. What I’d really like to see is the defensives sell off.”

Expectations for corporate earnings are climbing as roughly 20 percent of the S&P 500 reported second-quarter results in the past week. With 125 companies releasing results since the start of the season, profits are on pace to decline 4.5 percent, compared with an estimate of 5.8 percent a week ago, according to data compiled by Bloomberg.

Sales estimates are rising as well, according to analysts surveyed by Bloomberg. Year-over-year revenue growth is now poised to break even for the first time in five quarters, as sales beat estimates by the biggest margin in two years.

“An evenly balanced combination between the strong economic data and earnings so far has helped stocks continue to gain,” Walter Todd, who oversees about $1.1 billion as chief investment officer for Greenwood Capital Associates LLC in South Carolina, said by phone. “Analysts brought down a lot of their estimates, but so far we’ve seen a lot of companies exceed that and it’s helped sustain the move in the market.”

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