What Is a Barometer Stock?

A barometer stock—also called a bellwether stock—is a security whose performance is considered to be an indicator of the performance of its particular sector or industry, or the market as a whole.

Key Takeaways

  • A barometer stock is used as a proxy for the performance of a sector, industry, or the whole market.
  • Barometer stocks are usually shares that trade for corporations with a market capitalization of $10 billion or more and are nationally-recognized, well-established, and financially sound companies.
  • Barometer stocks are not always the best investment within their sector or market, and their reliability as an indicator may change over time.

Understanding a Barometer Stock

Barometer stocks are commonly known as bellwether stocks in the U.S. stock market. These stocks act as a gauge for the overall market or sector. Analysts often look to barometer stocks to predict the direction in which an industry or market is likely to be headed in the short-term.

Barometer stocks are usually large-cap stocks—shares that trade for corporations with a market capitalization of $10 billion or more—or respected blue-chip stocks. A blue-chip stock is a nationally recognized, well-established, and financially sound company. If a barometer stock is experiencing a favorable performance, this may signal a bullish market. A bull market is the condition of a financial market in which prices are rising or are expected to rise. If a barometer stock is experiencing an unfavorable performance, this may signal a bearish market. A bear market is when a market experiences prolonged price declines. 

Many different types of securities can be classified as barometers; however, in the U.S., the shipping and rail stocks are often used as indicators for the U.S. economy—as such, they are considered barometer stocks. Barometer stocks can have a large influence on the economic health of the country.

While barometer stocks may indicate favorable performance in a sector (or in the economy), they are not always the best investments in a particular sector. A company’s rise to barometer status indicates that its growth days are long over. Because these companies are typically already very large, meaningful expansion is unlikely. While newer and emerging companies may provide more growth prospects, a barometer stock may still be a solid investment if the financials are stable, it can be bought at a value, and the future earnings are still expected to increase.

Examples of Barometer Stocks

FedEx's (FDX) quarterly results are considered a barometer in the U.S. Accordingly, strong revenues and earnings for FedEx correlate with healthy shipping activity by consumers and businesses alike. This activity can ebb and flow, and may provide information about the state of the economy. 

Caterpillar (CAT) is often viewed as a barometer for both the domestic economy and the global economy, with global sales of its construction equipment signaling global economic health.

Alphabet (GOOG), the parent company of Google, is considered a barometer of tech-sector performance by some analysts.

Barometer stocks change over time, as deteriorating performance, market share, earnings, or the stock's sector may prevent the stock from providing useful insight about the economy or the direction of the market indexes or sector.