Cyclical stocks' strong run may be due a pause despite leading markets this year, leading bank warns

• European cyclicals versus defensives are trading at highs while purchasing managers' indices have softened, creating a valuation gap that poses a near-term risk
• Market breadth has narrowed sharply with the proportion of stocks outperforming on a three-month basis hitting fresh lows in both the US and Europe
• JPMorgan recommends utilities, consumer staples and pharmaceuticals for near-term defensive rotation, but expects cyclicals to resume leadership in the second half if geopolitical risks subside

Summary

Key Development: JPMorgan Chase has warned that cyclical stocks may pause their strong performance despite outperforming markets in 2026, according to strategist Mislav Matejka.

Market Performance: Cyclical stocks (industrials, materials) have continued to lead defensive stocks (utilities, healthcare) in both Europe and the US, even amid the Iran conflict and when excluding large tech/AI stocks from comparisons.

Warning Signals:

• European cyclicals versus defensives are trading at highs while purchasing managers' indices (PMIs) have softened, creating a concerning divergence
• Market breadth has narrowed sharply, with the proportion of three-month outperforming stocks hitting fresh lows in both regions
• The rally is being driven by fewer stocks, suggesting weakening momentum

JPMorgan's Positioning:

• Entered 2026 long on value, small caps, and cyclicals in international portfolios
• Still sees upside for value stocks in Europe on valuation grounds
• Shifted to favor Magnificent Seven mega-cap tech stocks since March after US small-cap/value rally reversed following the Iran conflict

Investment Recommendations:

• Near-term defensive rotation: utilities, consumer staples, and pharmaceuticals identified as potential performers
• Long-term outlook: If macroeconomic conditions improve and geopolitical risks subside in H2 2026, cyclicals likely to resume leadership, potentially including consumer discretionary stocks (the year's cyclical laggard)

Date Referenced: May 18, 2026

The analysis suggests tactical caution on cyclicals near-term while maintaining a constructive longer-term view contingent on improved macro conditions.