Tesla vs. Exxon Is the Perfect Recovery Bet

Tesla is a bet on the long term and Exxon is a bet on the short term. Last year, investors were convinced to look to the long run by a combination of awful short-run prospects and the Federal Reserve’s crushing of interest rates and bond yields. Since November, investors have increasingly focused on short-run profits as both trends reverse, although on Tuesday the sensitivity to Treasurys showed up in the other direction as a sharp drop in yields helped Tesla stock leap 20%.

Cyclical stocks, those most sensitive to short-run economic growth, have been doing well since Covid-19 vaccines raised hopes of economic reopening. The stimulus trade accelerated in February as it became clear that President Biden’s $1.9 trillion package would pass. Cyclical stocks such as airlines and oil companies, commodities such as oil and copper, and bond yields all soared.

Exxon is what a winner looks like in this new world of stimulus-driven demand. Oil is the most sensitive commodity to global consumption, and everywhere is heading for reopening this year. As demand picks up, so does the price.

Exxon has such high fixed costs and had such an awful year last year—revenue failed to cover its costs even before a $20 billion write-down of the value of its assets—that any rise in revenue falls almost entirely to the bottom line. It has a lot of what investors call operating leverage, which has just the same effect as a lot of borrowing: Every extra dollar of revenue has a much greater effect on its earnings than for a company where costs are variable.

Across the market, last year’s weakness means operating leverage is the highest since the aftermath of the 2008-09 recession, according to David Kostin, chief U.S. equity strategist at Goldman Sachs.

Tesla is only barely profitable, but investors don’t really mind. Its stock depends not on this year’s earnings (which are expected to rise) but on earnings further in the future, when sales are expected to be much higher and it will finally—shareholders hope—deliver on the promise of self-driving cars.

Unfortunately for Tesla investors, the stock market cares less about the long run that it did. The election of a Democrat committed to combating climate change surely improved the long-run outlook for electric cars. But investors’ heads are turned by the rapidly improving prospects of companies that can make profits in the here-and-now from a better economy.

This isn’t about the short-term greed stock markets are so often accused of. The improving economy means higher bond yields, as markets price in higher future inflation. Higher yields push investors to prioritize the near term even more. That is because profits many years hence look less attractive if the safe alternative of Treasurys offers a decent income. Falling prices for long-dated bonds as yields rise are matched by falling prices for stocks with earnings that are long-dated, too.

The pattern holds across the speculative growth stocks, companies with little or no profitability but fast-rising sales. Biotechnology, financial technology, electric cars and clean energy all peaked and began to fall at roughly the same time.

It isn’t that sales look less good (aside from some that benefited from lockdowns). It isn’t that their profit prospects were damped—in many cases, including Tesla, 12-month earnings forecasts have risen even as stock prices fell. It is that the future earnings from those higher sales are less valuable with bond yields up, so even many of their fans realize they shouldn’t trade at such stratospheric multiples. Add to that momentum traders switching from pushing up the price to adding to the downward pull, and things have been grim.

Still, the falls have barely begun to reverse last year’s gains. Tesla has still more than tripled in the past year, despite a fall of more than a third from its late January high.

If bond yields keep going up, the speculative growth stocks will be hurt. Some of the weakest might even suffer the ignominy of having to change from expansion at all costs to cash-preservation mode as they find it harder to tap investors for new money. Newly listed lossmaking stocks that have been going public via SPACs are most exposed.

Against that, bond yields have already risen a lot, and if they fall back could reinvigorate the speculative growth stocks, as Tuesday’s big swings showed. Everyone knows economic expansion is on the way and oil briefly topped $70 a barrel this week, higher than before the pandemic struck, suggesting the recovery might already be anticipated in prices.

My view is that even after the big gains for cyclicals and bombed-out stocks, and big losses for the growth stocks, there is probably further to go as life returns to normal. But the scale of the moves means I’m a lot less sure of further gains for the Exxons of the world.

Write to James Mackintosh at James.Mackintosh@wsj.com