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Inflation and Infection Fail to Derail Markets' Rally: 5 Picks

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Wall Street suffered a bloody blow on Jul 16 (Friday) and 19 (Monday) on concerns of mounting inflation and the resurgence of the highly infectious Delta variant of COVID-19. The three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — plunged 3%, 2.3% and 1.9%, respectively. However, on Jul 20 and 21, these indexes rallied 2.5%, 2.3% and 2.5%, respectively.

The northward journey of the U.S. stock markets seems unstoppable despite intermittent fluctuations. Year to date, the Dow, the S&P 500 and the Nasdaq Composite are up 13.7%, 16% and 13.5%, respectively. Strong fundamentals of the U.S. economy and robust earnings results of corporate America should drive the stock markets going forward.

Robust U.S. Economic Recovery

The U.S. economy is recovering from the pandemic faster than expected as almost all parts of it have reopened. Nationwide COVID-19 vaccination on a priority basis was the primary reason for this impressive turnaround.

New coronavirus cases witnessed a sharp reduction in the first half of the year. However, cases of the Delta variant have increased in July. In fact, the resurgence of coronavirus is likely to compel Americans to get vaccinated urgently.

On the other hand, the recent spike in inflation is primarily owing to two reasons. The shortage of labor and supply-chain disruptions have raised the cost of production and in turn, pushed up prices of final products. The important point here is that businesses across sizes are expanding their scale of operations and hiring more despite soaring wages and salaries to cater to robust demand.    

At present, the personal savings of Americans are around an astonishing $2.6 trillion. The sky-high savings are allowing people to fulfill their demands that were pent up during lockdowns. Retail sales in June increased 0.6% from May and jumped 18% year over year. Reopening industries like air travel, leisure travel, dining at bars and restaurants, staying at hotels and motels and visiting theme parks are growing steadily.

Robust demand across the board should drive the U.S. economy for the rest of 2021. Per the average estimate projected by the IMF, the World Bank, the OECD, the Oxford Economics, the Fed, the Congressional Budget Office and several major investment banks, the U.S. economy is likely to grow around 7% in 2021, its highest in 37 years.

A high rate of growth like 7% is generally associated with emerging economies and undeveloped countries. It is very unusual for a highly matured economy like the United States to grow at 7%. This clearly indicates the strong momentum of the U.S. economy.

Corporate Profits Expected to Soar in 2021  

We have seen an impressive start to the second-quarter 2021 earnings season with an all-round strength. As of Jul 21, 73 companies of the S&P 500 Index reported results. Total earnings of these companies were up 108.2% year over year on 15.5% higher revenues. Moreover, 89% of these companies beat their earnings per share estimates and 83.6% surpassed revenue estimates.

For the second quarter as a whole, total earnings of the S&P 500 Index are expected to be up 71.3% year over year on 19.4% higher revenues. Total earnings of the S&P 500 companies are projected to climb 37.1% on 11.1% higher revenues in 2021 and will increase 10.6% on 6.4% higher revenues in 2022.

Our Top Picks

Several good stocks are available for investment in the rest of 2021. However, we have applied our VGM Style Score model to narrow down our search to five large-cap (market capital > $20 billion) stocks that have provided more than two times of the S&P 500's return year to date.

These stocks have strong growth potential for the rest of 2021 and have seen solid earnings estimate revisions within the last 7 days, indicating that the market currently expects these companies to do solid business in 2021. Each of our picks carries a Zacks Rank #1 (Strong Buy) and a VGM Score of A or B. 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 Research
Image 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 12.6% over the last 7 days. The stock price has soared 74.6% year to date.

Ford Motor Co. (F - Free Report) designs, manufactures, markets, and services a range of Ford cars, trucks, sport utility vehicles, electrified vehicles, and Lincoln luxury vehicles worldwide. It operates through three segments: Automotive, Mobility and Ford Credit.

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 17% over the last 7 days. The stock price has jumped 61.4% year to date.

EOG Resources Inc. (EOG - Free Report) explores, develops, produces and markets crude oil, and natural gas and natural gas liquids in the United States and internationally.

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 moved up 1.9% over the last 7 days. The stock has climbed 48.8% year to date.

CarMax Inc. (KMX - Free Report) operates as a retailer of used vehicles in the United States. It operates in two segments, CarMax Sales Operations and CarMax Auto Finance.

The company has an expected earnings growth rate of 46.5% for the current year (ending February 2022). The Zacks Consensus Estimate for current-year earnings has improved 3% over the last 7 days. The stock price has appreciated 43.9% year to date.

General Motors Co. (GM - Free Report) designs, builds, and sells cars, trucks, crossovers and automobile parts worldwide. It operates through the GM North America, GM International, Cruise and GM Financial segments.

The company has an expected earnings growth rate of 35.1% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 4.4% over the last 7 days. The stock price has advanced 37% year to date.