By Jacob Sonenshine

The U.S. is headed for a recession -- except that it may not be. If one doesn't materialize, economically sensitive stocks, known on Wall Street as cyclicals, will be the place to be.

Recession fears feel justified. The concern is that tariffs will slow consumer and business demand, and bring the economy to a halt. But there hasn't been any hard evidence of that, not in first-quarter gross domestic product growth, which showed that consumer spending and business investment grew, and certainly not in April's jobs report, which came in stronger than expected. Even the survey data cooperated this past week, with last month's Institute for Supply Management services purchasing managers' index rising to 51.6% when it was expected to fall to 50.2%.

If the trend continues, it would bode well for stocks in cyclical sectors, those that take the hardest hits in recession and perform the best when the economy grows. Some of them are still trading well below peaks and have lots of ground to recover if the U.S. sidesteps a recession.

It starts with banks. The SPDR S&P Bank exchange-traded fund, which counts Mr. Cooper Group, First BanCorp, and JPMorgan Chase among its largest holdings, is still down 12% from its 2025 peak. The fear is that loan demand will suffer, while companies hold off on acquisitions, pressuring investment banking revenue. Banks could even be forced to curb their share repurchases if the stress increases.

But better economic data could begin to assuage some of those concerns -- and push the stocks higher. It would mean that banks could actually grow sales at the 7% annual clip analysts are predicting. That should help nudge profit margins higher and allow these banks to repurchase stock, prodding earnings per share to grow 15% annually. The bank ETF also trades at about 10 times 12-month forward earnings, down from 13 times at the end of 2024, before concerns about tariffs flared up, offering a margin of error.

Retail stocks are in a similar position. The SPDR S&P Retail ETF, which owns the likes of Carvana, Nordstrom, and Victoria's Secret, is down 14% from its high this year and trades at just over 13 times earnings. That's more than a third below the S&P 500. When it's in favor, it can trade in line with the index. The sector isn't growing sales quickly -- analysts expect just under 3% annual sales growth over the next two years -- but earnings should grow 8% annually.

Many companies in the fund, such as TJX, Ulta Beauty, and Walmart, have enough cash to buy back stock. "If you do sidestep [a] recession and the tariff impact is not as great, you could see a rebound," says Nick Kalivas, head of factor strategy at Invesco.

Copper miner Freeport-McMoRan is also worth a look. The stock, at a recent $37, has fallen 12% from its high of the year and is down a tick in 2025, even though copper has risen 17%. That's not how it's supposed to work. Usually, the two are highly correlated because higher copper prices should equate to higher sales and earnings for Freeport. In fact, in the past three years, when copper was at its current $4.755, Freeport stock was around $40 or higher. That suggests Freeport stock should be trading at least 8% higher as long as the economy and copper demand remain strong.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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May 09, 2025 21:30 ET (01:30 GMT)

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