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Second Half Stock Market Outlook

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My outlook for the market remains very positive, even as I acknowledge that there is some uncertainty in the air regarding the issues of inflation and the Fed.

While it’s hard to be 100% sure about such issues, I am confident that:

1) Higher inflationary readings are likely caused by the supply-chain straining to meet a mini consumption boom. After a year of forced hibernation, this is exactly what you’d expect to see. As such, we may see a few more months of elevated inflation readings, but the issue will subside towards the end of the year as the supply-demand balance gets back in sync.  

2) The Fed has done an excellent job spearheading the economy through some very difficult times in the recent past. Jay Powell and team are more than capable of transitioning the markets to normal interest rates.

Two forces drive stock prices in the long run – interest rates and earnings. And even pessimists acknowledge that the outlook for both remains very favorable.

The current administration's fiscal policies have not only boosted growth, but also increased the length of the current economic expansion that started way back in 2009.

History tells us that every period of economic expansion is followed by a recession and that will eventually happen to this expansion as well. But there is nothing in current economic or corporate data that suggests we are heading towards a recession any time soon.

The fact is that the outlook for the U.S. economy is very strong, with a growth pace that we normally associate with China and other emerging economies.


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Keep in mind that stocks in the aggregate are hardly nose-bleed expensive, notwithstanding pockets of excess in areas like cryptos, SPACs and EVs that have started to reverse already. The S&P 500 index is currently trading at 21.4X forward 12-month earnings, down from 23.8X in August last year, but generally in the vicinity of where the index traded in the late 1990’s ahead of the bursting of the Tech bubble.

Looking at valuation metrics like that, in isolation from interest rates, is totally misleading. The next time you hear or read a market bear argue that current market valuation is comparable to what it was at the time of the Tech bubble, you should tell them that the 10-year treasury bond yield above 6% then and is barely at 1.5% currently.

I would be worried about current market valuation if interest rates were at or heading towards 6% or even 5% any time soon. But they are not.  

3 Ingredients to Outperform

I strongly believe that most investors should be able to generate decent gains through the rest of the year. But if you want better than average performance, then consider the strategies below to outpace the market. The Top 10 for 2021 portfolio, which relies on these and other winning strategies, performed substantially better than the market in the first half of the year.

Investors will need to dig a little deeper to find the best stocks to outperform. Beyond selecting stocks with top ratings (Zacks Rank, Style Scores and Industry Rank), you will also want to load up your portfolio with more of the ingredients listed below. 

Ingredient #1: growth, Growth, GROWTH! 

The aforementioned inflation and interest rate worries have shifted market sentiment on growth stocks. I am not worried about inflation and see the current rotation out of growth stocks as providing a long-awaited opportunity to buy quality growth names at significant discounts relative to where they traded just a few months back.

Start with expected earnings growth above the norms. The minimum level is 10% per year...but better at 15%, 20% or more. In addition, seek out companies that are beating earnings regularly with rising estimates. Yes, the Zacks Rank is your best friend in that pursuit. So focus on Zacks Rank #1 and #2 growth stocks.

Ingredient #2: Go Small or Go Home

This one goes hand in hand with Ingredient #1 above. The Flight to Safety movement the past few years also meant outperformance for large cap stocks and those with large dividend yields.

Now those ultra-conservative names are played out, and growth oriented small caps and mid-caps are starting to win the day. This trend should continue given all the ground they need to make up from the past few years of underperformance.

Yes, these smaller stocks are generally riskier. That is why you should consider having more stocks in your portfolio, each with a smaller allocation. This form of diversification also helps mitigate risk so you can enjoy greater rewards.

Ingredient #3: Value 

It never hurts to buy stocks at a discount to their peers. The problem is that most investors have a set of historical standards for what they believe equates to a value stock. I am referring to certain measures of PE or Book Value or PEG, etc., that typically denote an undervalued security.

Unfortunately, after many years of a bull market you will discover that most every stock is above those levels. Thus, those looking for absolute value based on these historical measures will find no stocks in their basket. So, the key is to use relative value measures to squeeze out additional gains. That is where the Zacks Value Score comes into play.

For example, our "A" rated value stocks are in the top 20% in terms of the value criteria that have been proven to lead to outperformance. Combine that with "B" rated stocks and you will be focused on the top 40% of value stocks available. These stocks should make up the bulk of your portfolio. And yes, do strongly consider selling those with D or F ratings for this important criteria as they will prove to be a drag on your portfolio. 

A Good Place to Find Stocks for the Rest of the Year  

Another ingredient for finding stocks likely to climb steadily higher is looking for industries that are set to major comebacks after being beaten down by pandemic restrictions over the past several months.

One sector that looks especially promising is travel. After more than a year of shutdowns and border closings, consumers are ready to resume traveling again. Capital is flooding into the sector once again. As a result, several travel stocks set new all-time highs this spring. This trend is likely to continue, giving investors the opportunity to capture substantial gains – especially those that build positions early.

Our team at Zacks has just released a Special Report to help you do exactly that. Travel Mega-Boom: 8 Stocks for the Trillion-Dollar Rebound explores leading companies in eight different travel-related areas, then selects the single stock in each area we believe will soar the most in the weeks and months ahead.

I encourage you to download the Travel Mega-Boom report right away. The sooner you see these stocks, the more potential gains you stand to gain. So don’t delay. The deadline to access this report is midnight Sunday, June 27.

See these 8 travel stocks now >>

Good investing,

Sheraz Mian

Sheraz Mian is our Director of Research. He determines which data to use for assessing stocks and funds. He is a contributor for Zacks Equity Research and Earnings Analysis, and is also the Editor of Zacks Top 10 Stocks.

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