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S&P 500 Likely to Journey Northward in June: 5 Top Picks

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Wall Street continued its northbound journey in the first five months of this year. However, the market remained skeptical about June as this month is historically known as the weakest on Wall Street after September.

Meanwhile, Instinet points out that of late, the S&P 500 has in fact gained in June. Over the last 20 years, the benchmark ended in red 11 times with an average decline of 0.6%. However, since 2016, the broad-market index has always finished June in positive territory.

The latest trend of the S&P 500 Index is likely to be repeated this year buoyed by a strong U.S. and global economic recovery despite growing concerns of inflationary pressures.

U.S. to Lead Global Economic Recovery in 2021

Several global economic agencies projected an astonishing turnaround of the U.S. economy in 2021 will lead to global economic recovery. The U.S. rebound should drive demand for the country's major trading partners, including Canada, Mexico, China and the Eurozone countries.

On Apr 6, the International Monetary Fund (IMF) raised the U.S. GDP growth forecast for 2021 to 6.4% from 5.1% projected in January. Consequently, the global GDP growth rate for 2021 was raised to 6% from 5.5% forecast in January.

On May 31, the Organization for Economic Cooperation and Development (OECD) raised the U.S. GDP growth rate for 2021 to 6.9% from 6.5% projected in March. Global GDP was projected to grow 5.8% in 2021 from 5.6% estimated in March.

The Oxford Economics predicted 7.7% U.S. GDP growth in 2021, up from 7% estimated on March. Supported by strong U.S. economic growth, world GDP is estimated to rise 6.3% compared with the 6.1% forecast in March.

On Apr 18, the Wall Street Journal reported that economists on average expect U.S. GDP to expand nearly 6.4% this year from 6% in March. Per the Wall Street Journal, this will be the largest U.S. GDP growth since 7.9% in 1983.

Solid Economic Fundamentals

The U.S. economic fundamentals remained robust supported by unprecedented fiscal and monetary stimulus. The coronavirus-led economic devastations were far less than anticipated 15 months ago owing to this gigantic stimulus. Moreover, the Biden administration's proposed multi-trillion-dollar investment in infrastructure, health care and education will drive future growth.

Strong pent-up demand supported by the astonishing $2.3 trillion savings by Americans should drive consumer spending, the largest component of the U.S. economy, going forward.

U.S. manufacturing is thriving in the last 12 months while the services sector is showing an impressive rebound in 2021. Weekly jobless claims fell in the last six reported quarters and is currently at the lowest level in the pandemic era due to reopening and the hiring spree by U.S. businesses.

Meanwhile, consumer satisfaction optimization indexes remained elevated despite inflationary concerns. Investors are more optimistic about the future for which they are investing more in U.S. startup companies.

Per the data firm PitchBook Data Inc., these companies raised around $69 billion in the first quarter of 2021, up a massive 41% from the previous record booked in the fourth quarter of 2018.

Fed Yet to Trigger Inflation Button

Market participants are highly concerned about inflation in the last couple of months of the year. The consumer price index (CPI) — popularly known as household inflation —  jumped 4.2% year over year in April, its highest since September 2008. Year over year, the core PCE inflation — Fed's favorite gauge of inflation — climbed 3.1% in April, marking the highest monthly gain since July 1992. The figure was well above the Fed's target rate of 2%.

The Fed has so far maintained that any inflation above its targeted 2% in 2021 will be transitory. Recently released higher inflation data may be due to the extremely low base last year when the pandemic had rattled the whole economy.

Moreover, a transitory inflation may be good for the U.S. economy. Higher inflation means higher aggregate demand, which will enable businesses to deploy higher capital spending and recruit more manpower.

Businesses can generate higher profits despite raising the wage rate. The spread between higher inflation and higher wage will increase their profit and induce them to increase the scale of operation and lead to higher job creation.

Our Top Picks

We have narrowed down our search to five large-cap (market capital > $ 10 billion) S&P 500 stocks that have popped more than the benchmark year to date. These stocks have strong growth potential for 2021 and have witnessed robust earnings estimate revision within the last 7 to 30 days, indicating solid business prospects.

Moreover, these companies are regular dividend payers and will act as an income stream during the market's downturn. Each of our picks carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks year to date.

Zacks Investment ResearchImage Source: Zacks Investment Research

Nucor Corp. (NUE - Free Report) is a leading producer of structural steel, steel bars, steel joists, steel deck and cold-finished bars in the United States. It operates through three segments: Steel Mills, Steel Products, and Raw Materials.

The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for its current-year earnings has improved 2.6% over the last 7 days. The stock has a current dividend yield of 1.46% and soared 97.4% year to date.

D.R. Horton Inc. (DHI - Free Report) is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses both in the entry-level and move-up markets of the United States..

The company  has an expected earnings growth rate of 62.1% for the current year (ending September 2021). The Zacks Consensus Estimate for its current-year earnings has moved up 0.7% over the last 7 days. It has a current dividend yield of 0.84%. The stock has jumped 34.9% year to date.

Target Corp. (TGT - Free Report) operates as a general merchandise retailer in the United States. It offers beauty and household essentials, food assortments, including perishables, dry grocery, dairy, and frozen items; and apparel, accessories, home decor products, electronics, toys, seasonal offerings, and other merchandise.

It has an expected earnings growth rate of 25.6% for the current year (ending January 2022). The Zacks Consensus Estimate for current-year earnings has improved 2.1% over the last 7 days. The stock has a current dividend yield of 1.2% and climbed 29.4% year to date.

Dow Inc. (DOW - Free Report) provides various materials science solutions for consumer care, infrastructure, and packaging markets in the United States and internationally. It operates through the Packaging & Specialty Plastics, Industrial Intermediates & Infrastructure, and Performance Materials and Coatings segments.

The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 2% over the last 7 days. The stock has a current dividend yield of 3.98% and rallied 24.2% year to date.

Cummins Inc. (CMI - Free Report) designs, manufactures, distributes, and services diesel and natural gas engines, electric and hybrid powertrains, and related components worldwide. It operates through five segments: Engine, Distribution, Components, Power Systems, and New Power.

The company has an expected earnings growth rate of 32.9% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 13.4% over the last 30 days. The stock has a current dividend yield of 2.06% and surged 14.4% year to date.

Infrastructure Stock Boom to Sweep America

A massive push to rebuild the crumbling U.S. infrastructure will soon be underway. It’s bipartisan, urgent, and inevitable. Trillions will be spent. Fortunes will be made.

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