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Why certain sectors tend to lead in early stages of an economic cycle and others in later stages — and why it's a statistical tendency, not an exact formula.
Sector rotation is the phenomenon where institutional money tends to flow from sector to sector depending on the stage of the economic cycle — not all sectors lead or lag at the same pace at the same time. Cyclical sectors (like technology, consumer discretionary) tend to lead as the economy strengthens; defensive sectors (like staples, healthcare, utilities) tend to hold up better as it weakens.
The basic logic: when rates fall and growth accelerates, companies with high sensitivity to growth (return on excess demand) earn a valuation premium. When rates rise or growth slows, investors prefer companies with steadier cash flow that's less cycle-dependent, even at a lower growth rate.
It's important to stress: this is a statistical pattern observed over time, not an exact formula that repeats in the same order every cycle. One-off events (government policy, a technological breakthrough, a geopolitical shock) can disrupt any 'expected' pattern.
Sector rotation is a useful context for analysis — not a market-timing tool. Breaking down a portfolio's sector exposure (as shown on StockIQ's portfolio analysis page) helps you understand what cyclicality you're exposed to, not predict exactly when the next rotation will happen.
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The information in this guide is intended for general educational purposes only and does not constitute investment advice. Full details on the disclaimer page.