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U.S. Economy Exceeds Pre-Pandemic Level: 5 Top Picks

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On Jul 29, three major economic data were released that disappointed Wall Street. Second-quarter 2021 U.S. GDP fell well below expectations, weekly jobless claims missed the consensus estimate and pending home sales dropped last month.

Yet, the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — advanced 0.4%. 0.4% and 0.1%, respectively. The small-cap centric Russell 2000 was up 0.7%. Let's discuss three factors that likely strengthened investors' confidence.

Consumer Spending Remains Rock Solid

The Department of Commerce reported that the U.S. GDP grew 6.5% in second-quarter 2021, far below the consensus estimate of 8.4%. Despite missing the estimate, in absolute term, U.S. GDP in second-quarter 2021 came in at $19.4 trillion, exceeding $19.2 trillion recorded in fourth-quarter 2019, the last quarter before the global outbreak of coronavirus.

In fact, the weak result was predominantly owing to less-than-expected inventories, residential investment and government spending together with net exports. The consumer spending that accounts for nearly 70% of the GDP, remained robust. Personal consumption expenditures (PCE) soared 11.8% in the second quarter beating 11.4% in the first quarter. The core PCE (excluding volatile food and energy items) jumped 6% in the second quarter from an  upwardly revised 2.7% in the previous quarter.

A section of economists and financial experts were skeptical that the U.S. economy can reach the pre-pandemic level the earliest in fourth-quarter 2021 or in first-quarter 2022. However, this happened in the first half of this year owing to the great reopening of the economy.

Fed's Dovish Monetary Stance Likely to Continue

The Department of Labor reported that weekly jobless claims fell by 24,000 to a seasonally adjusted 400,000 for the week ended Jul 24. However, this figure  is almost double the pre-pandemic level. The labor market is the most concerning segment of the Fed at present.

On Jul 28, after the conclusion of the Fed's two-day FOMC meeting, the central bank approved unanimously that the economy has strengthen yet it has not made substantial further progress either in terms of price stability or maximum employment. The Fed Chairman Jerome Powell said, “We see ourselves having some ground to cover to get there.”

The gradual and not a V-shaped recovery of the struggling labor market along with weaker-than-expected GDP growth in the last quarter indicates that the economy may not be overheated and the current augmentation of the general price level is transitory.

Strong Consumer and Business Confidences  

On Jul 27, the Conference Board reported that the consumer confidence index increased to 129.1 in the month, marking its highest level since February 2020. The short-term expectations of inflation declined in July . Consequently, spending intentions picked up in this month, with a larger percentage of consumers saying that they planned to purchase homes, automobiles, and major appliances in the coming months.

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 the 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.  

The personal savings of Americans are around an astonishing around $2 trillion. The sky-high savings are allowing people to indulge in their demands that were pent up during lockdowns.  The strong pent-up demand will likely drive consumer spending in the second half of 2021.

Our Top Picks

We have narrowed down our search to five corporate giants (market capital>$ 50 billion) that have seen positive earnings estimate revisions for 2021 within the last 7 days, indicating that the market is expecting these companies to do solid business in the rest of this year.

These stocks have strong growth potential for 2021. Each of our picks sports 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 in the past six months.

Zacks Investment Research
Image Source: Zacks Investment Research

NIKE Inc. (NKE - Free Report) ) provided strong guidance for fiscal 2022 and set long-term targets for fiscal 2025, driven by the momentum in its business as it comes out of the pandemic. For fiscal 2022, the company anticipates revenue growth in low-double digits, surpassing $50 billion, driven by strong customer demand across its operating segments.

The company expects to benefit from robust digital growth, scaling NIKE-owned physical retail concepts and growing with partners. The company has an expected earnings growth rate of 20.2% for the current year (ending May 2022). The Zacks Consensus Estimate for current-year earnings has improved 0.7% over the last 7 days.

General Motors Co. (GM - Free Report) is seeing strong demand for profitable trucks and SUVs that is driving its revenues. The company revamped the crossover lineup and is launching all-new, full-size pickups, followed by full-size SUVs.

The company's hot-selling brands in the United States like Chevrolet Silverado, Equinox and GMC Sierra are driving the top line. Sales for these brands are expected to grow further. General Motors has an expected earnings growth rate of 38.6% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.3% over the last 7 days.

Marsh & McLennan Companies Inc. (MMC - Free Report) a professional services company, provides advice and solutions to its clients in the areas of risk, strategy, and people worldwide. It operates in two segments, Risk and Insurance Services, and Consulting.

The company's operating performance has been favorable for the past many years, driven by its diverse product offerings, a wide geographic footprint and strong client retention. It has an expected earnings growth rate of 22.1% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 7.1% over the last 7 days.

Capital One Financial Corp. (COF - Free Report) is primarily focused on consumer and commercial lending as well as deposit origination providing various financial products and services in the United States, the United Kingdom, and Canada. It operates through three segments: Credit Card, Consumer Banking and Commercial Banking.

The company's Credit Card segment is likely to continue showing strength. In the first half of 2021, Domestic Card, which accounted for 92.2% of the Credit Card net revenues, reflected robust loans held for investment balance. It 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.

Intuitive Surgical Inc. (ISRG - Free Report) designs, manufactures, and markets da Vinci surgical systems, and related instruments and accessories. Its da Vinci Surgical System transforms the surgeon's natural hand movements outside the body into corresponding micro-movements inside the patient's body.

The company continuously introduces technologies for surgical systems. Management aims to advance its new platforms of imaging, advanced instruments, da Vinci SP and the flexible catheter platform. It has an expected earnings growth rate of 44.9% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.7% over the last 7 days.