Wall Street is like to provide a happy hunting ground for the bulls in the second half of 2021. A faster-than-expected recovery of the U.S. economy buoyed by a nationwide COVID-19 vaccination driven reopening, soaring consumer and business sentiments, robust pent-up demand supported by astonishing personal savings, and the gradual improvement of the struggling labor market paved the way for the ongoing northward journey of U.S. stock markets despite occasional fluctuations.
Supported by an unprecedented fiscal and monetary stimulus together with the inherent strength of the U.S. economy, all the three major large-cap centric stock indexes, the two small-cap specific indexes and the mid-cap centric index recorded double-digit returns in the first half.
U.S. Economy Resembles Goldilocks Now
Theoretically, a goldilocks economy describes an ideal state for an economy that is not too hot or too cold. This means the economy is neither expanding or contracting out of control. The current growth is sufficient enough to eliminate any kind of recessionary fear. At the same time, growth is not going to result in exaggerated inflation, which could sustain for a long time period.
The U.S. economy is witnessing a robust recovery in 2021 from last year's coronavirus-led devastations. U.S. manufacturing is flourishing and the services sector is expanding gradually on the back of reopening. The economy added 850,000 jobs in June, marking its highest since August 2020, beating the consensus estimate of 684,000.
Meanwhile, a faster-than-expected recovery has resulted in a jump in inflation. The core PCE price index — Fed's favorite inflation gauge — climbed 3.4%, its highest since April 1992. The consumer price index (“CPI”) jumped 5% year over year in May, its highest since September 2008. Moreover, year over year, the average wage rate surged 3.6% in June.
However, the U.S. economy is yet to reach its pre-pandemic level as some parts of it are still not operational. Still 6.78 million less Americans are in the job market in June compared with the pre-pandemic level of February 2020. Unemployment rate came in at 5.9% in June compared with 3.5% in February 2020. The total number of Americans receiving benefits across all types government programs were as high as 14.66 million for the week ended Jun 14.
The Fed has reiterated that it will continue to pursue an easy-monetary policy until the labor market recovers fully. The Fed Chairman Jerome Powell has reaffirmed that the recent augmentation in the general price level to be transitory.
The current thrust of the demand-pull inflation will settle down once the initial euphoria of pent-up demand evaporates and the existing $300 per week unemployment benefit comes to an end in September. The cost-push inflation due to supply-chain disruptions and the labor shortage problem is expected to cool down to a great extent by this year-end as businesses are already looking for affordable alternative sources.
Most of the economists and financial experts are expecting the U.S. economy to grow around 7% in 2021, its highest in 37 years. Thereafter, it is likely to cool down around 2.5% through 2023. The Fed expect inflation to cool down to 2.1% in 2022 and 2.2% in 2023.
Therefore, the current U.S. economic condition is such that strong growth is expected in the near term with accommodative monetary policies. The central bank has just given a signal that it may hike rates from late 2023 and no time-line for starting the tapering of the $120 billion per month quantitative easing program has been given.
Strong Consumer and Business Optimism
Per our projections on Jul 2, total earnings of the market's benchmark — the S&P 500 Index — are expected to climb 35.5% year over year on 10.7% higher revenues in 2021. Moreover, in 2022, total earnings of the S&P Index are forecast to grow 11.3% year over year on 6.4% higher revenues. In 2023, total earnings of the S&P Index are forecast to grow 11.6% year over year on 5.1% higher revenues.
Consumer spending, the major driver of the U.S. economy, is expected to remain firm buoyed by around $2.6 trillion of savings. The Conference Board reported that the U.S. consumer confidence index jumped to 127.3 points in June from an upwardly revised 120 in May, marking its highest level since February 2020.
The first half of 2021 was extremely favorable for mergers and acquisitions (M&A) and initial public offerings ("IPO"). A massive surge in IPO indicates ample investor appetite for new stocks and growing confidence for risky assets like equities. Likewise, the impressive performance of Wall Street and the stable fundamentals of the U.S. economy are the major drivers of strong M&A deals.
Finally, the Markets benchmark — the S&P 500 Index — has rallied 14.4% year to date. According to LPL Financial, when the S&P 500's advance is greater than 12.5% in the first six months of a year, it usually records a median return of 9.7%, which is nearly twice the median return of 5% for any given year.
Our Top Picks
We have narrowed down our search to five corporate behemoths (market capital > $50 billion) that have witnessed positive earnings per share (EPS) estimate revisions in the last seven days. Corporate bigwigs generally have well established business model, strong financial position and globally acclaimed brand names.
A positive EPS estimate revisions within the past 7 days means that the market is currently expecting these companies to do solid business in the rest of 2021. Finally, each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (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 in the past six months.
Image Source: Zacks Investment Research NVIDIA Corp. ( NVDA Quick Quote NVDA - Free Report) is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or GPU. Over the years, the company’s focus has evolved from PC graphics to AI- based solutions that now support high-performance computing, gaming and virtual reality platforms.
It has an expected earnings growth rate of 59% for the current year (ending January 2022). The Zacks Consensus Estimate for the current year has improved 0.4% over the last 7 days. The Zacks Rank #1 company has a current dividend yield of 0.1%. The stock price has soared 53.5% in the past six months.
Applied Materials Inc. ( AMAT Quick Quote AMAT - Free Report) is a global leader in semiconductor equipment space. The company is the number one equipment supplier to the global semiconductor industry. Moreover, its AI Design Forum bodes well for its strong focus on the development of new computing materials and designs.
It has an expected earnings growth rate of 57.1% for the current year (ending October 2021). The Zacks Consensus Estimate for the current year has improved 0.3% over the last 7 days. The Zacks Rank #2 company has a current dividend yield of 0.7%. The stock price has jumped 46.1% in the past six months.
Target Corp. ( TGT Quick Quote TGT - Free Report) has undertaken several strategic initiatives to boost performance. It has been deploying resources to enhance omni-channel capacities, including same-day delivery of in-store purchases and accelerate technology improvements. Target has been aggressively adopting strategies to provide a seamless shopping experience through miscellaneous channels.
It has an expected earnings growth rate of 28.5% for the current year (ending January 2022). The Zacks Consensus Estimate for its current-year earnings has improved 2.3% over the last 7 days. The Zacks Rank #1 company has a current dividend yield of 1.1%. The stock price has climbed 29.1% in the past six months.
FedEx Corp. ( FDX Quick Quote FDX - Free Report) is the leader in global express delivery services. It provides a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the FedEx brand.
The company has an expected earnings growth rate of 16.1% for the current year (ending May 2022). The Zacks Consensus Estimate for current-year earnings has improved 0.4% over the last 7 days. The Zacks Rank #2 company has a current dividend yield of 1%. The stock price has appreciated 21.7% in the past six months.
NIKE Inc. ( NKE Quick Quote NKE - Free Report) is engaged in the business of designing, developing and marketing athletic footwear, apparel, equipment and accessories, and services for men, women and children worldwide. Despite global economic volatility, NIKE expects to continue investing in key capabilities to aid digital transformation and deliver robust growth in the long-term.
It has an expected earnings growth rate of 18.5% for the current year (ending May 2022). The Zacks Consensus Estimate for its current-year earnings has improved 1.4% over the last 7 days. The Zacks Rank #1 company has a current dividend yield of 0.7%. The stock price has advanced 10.2% in the past six months.
Zacks Names “Single Best Pick to Double”
From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.
You know this company from its past glory days, but few would expect that it’s poised for a monster turnaround. Fresh from a successful repositioning and flush with A-list celeb endorsements, it could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in a little more than 9 months and Nvidia which boomed +175.9% in one year. Free: See Our Top Stock and 4 Runners Up >>