What Is a Bellwether Stock?
A bellwether stock is a stock believed to be a leading indicator of the direction of the economy or of a sector of the market or the market as a whole. Bellwether stocks are typically large-cap equities. When they report strong earnings, that may indicate the economy is strong. Their market performance may also signal how a sector or the market as a whole is likely to perform.
- A bellwether stock is a stock that is used to gauge the performance of the market or macro-economy in general.
- These stocks are typically mature, large-cap, blue chip companies whose earnings may be a leading economic indicator.
- Some examples include GE, GM, Alcoa, FedEx, and Alphabet.
Understanding Bellwether Stock
A bellwether stock is a stock that is used to gauge the performance of the market or macro-economy in general. A bellwether stock's status as a bellwether status may change over time, but in the equities markets, the largest, most well-established companies in an industry are often the bellwethers. Usually profitable and stable, most bellwether stocks have proven themselves in an industry with established customer bases and formidable brand loyalty. Some have also proven to be resistant to economic downturns. These stocks also form the foundation of most major market indices; large-cap bellwethers dominate the Dow Jones Industrials, the S&P 500, and the NASDAQ.
While bellwether stocks may indicate future developments, they are not always the best investments in a sector. Once a company achieves bellwether status, its market-beating growth days are usually well behind it and its enormous size makes meaningful expansion difficult. Instead, investors may use bellwether stocks as indicators while actually putting their money into up-and-coming stocks, with plenty of growth potential ahead of them, which they believe could be the bellwethers of the future.
Examples of Bellwether Stocks
For many years, General Motors (GM) was an example of a bellwether stock, hence the saying, "What's good for GM is good for America." Quarterly financial results of the company have long been considered a bellwether. FedEx (FDX) is also considered a bellwether for the economy. Strong revenues and earnings for FedEx suggest strong consumer and business shipping activity, which ebbs and flows with the strength of the economy.
Many different stocks may be classified as bellwethers. Alcoa Aluminum (AA), for example, is considered a bellwether for the economy because it operates in a cyclical industry, and if it reports strong earnings, that suggests the economy is strong. In addition, it is the first major company to report quarterly earnings, and its report is considered a bellwether for the corporate earnings season.
Quarterly financial results for General Electric (GE), a large conglomerate, have long been considered a bellwether. FedEx is also considered a bellwether for the economy. Strong revenues and earnings for FedEx suggest strong consumer and business shipping activity, which ebbs and flows with the strength of the economy. Shipping and rail stocks have historically been particularly good bellwethers for the U.S. economy.
Caterpillar (CAT) has often been viewed as a bellwether not only for the domestic economy but also the global economy. Global sales of its construction equipment can signal global economic health.
Alphabet (GOOGL), the parent company of Google, is considered a bellwether of tech sector performance by some analysts.