Cyclical and non-cyclical (defensive) stocks differ mainly in how they react to changes in the business cycle. Cyclical stocks are tied closely to economic growth. They belong to industries like automobiles, airlines, luxury goods, construction, and travel, sectors that thrive when consumer spending is strong. During economic expansion, these stocks often outperform the market because demand rises, company profits grow, and investors become more optimistic. However, in a recession or slowdown, cyclical stocks typically decline sharply as people cut back on discretionary spending and companies see lower revenues.

Non-cyclical or defensive stocks, on the other hand, remain relatively stable regardless of the economy’s condition. They include industries such as utilities, healthcare, consumer staples, and basic services. Since people need electricity, food, and medicine whether the economy is booming or shrinking, these companies tend to generate consistent earnings. As a result, their stock prices are less volatile and act as a haven during downturns.

In short, cyclical stocks are riskier but offer higher growth potential in expansions, while defensive stocks provide stability and steady returns in all phases of the business cycle. Many investors balance both types to manage risk and capture opportunities.