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S&P 500 Jumps More Than Double Since Pandemic Low: 5 Picks

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On Aug 16, the S&P 500 Index achieved a milestone, jumping more than 100% on a closing-price basis from the pandemic-era low recorded on Mar 23, 2020. According to a CNBC analysis of data from the S&P Dow Jones Indices, the market's benchmark gained 100.2% from Mar 23, 2020 to Aug 16, 2021, on a closing-price basis.

Per CNBC analysis, the S&P 500 Index took 354 trading days to reach this milestone, marking the fastest bull market rally doubling off a bottom, since World War II. On Aug 16, the index posted another closing at an all-time high, marking its 49th closing high so far this year in 156 trading days. This reflects the S&P 500's highest number of closing highs since 1950.

Last year, the major driver of the S&P 500 Index was the technology sector as the U.S. economy was mostly under lockdown. Americans had no option but to depend on work from home, shop online, or spend more time on gaming and other tech-oriented services.   

However, in 2021, the major drivers are the cyclical sectors like industrials, materials, energy, financials and consumer discretionary. Buoyed by the massive deployment of COVID-19 vaccine nationwide, most parts of the economy have already reopened. Consequently, reopening stocks are flourishing in 2021.

Whatever the driver, the major thrust for  an astonishing recovery of the U.S. economy came from an unprecedented fiscal and monetary stimulus provided by the government and the Fed. Since March 2020, more than $6 trillion has been injected into the economy in terms of either fiscal or monetary stimulus. Moreover, the Fed reduced the benchmark interest rate to near zero and has maintained that level.

4 Near-Term Catalysts

First, as of Aug 13, 458 companies of the S&P 500 Index reported results. Total earnings of these companies jumped 102.9% year over year on 27.6% higher revenues. The proportion of these companies beating consensus EPS (earnings per share) and revenue estimates came in at 86.7% each. If this figure is maintained till the end of the earnings season, it will be the highest percentage of S&P 500 companies reporting EPS surprises in more than a decade.

Notwithstanding favorable comparisons with last year, second-quarter 2021 earnings estimates indicate more than 30% growth from the pre-pandemic second quarter of 2019. Total 2021 earnings of the S&P 500 Index were projected to climb 42.1% on 12.7% higher revenues. For 2022 and 2023, S&P 500's total earnings are likely to grow 9.4% and 10.2% on 6.6% and 4.7% higher revenues, respectively. (Read More: 3 Things to Know About the Q2 Earnings Season)

Second, the U.S. economy grew 6.3% and 6.5% in first and second-quarter 2021, respectively. Moreover, 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. Per the estimate projected by several globally renowned financial agencies and investment bankers, the U.S. economy is expected grow 6.5-7% on average in 2021.

Third, U.S. 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 $2 trillion. The sky-high savings are allowing people to indulge in their demands that were pent up during lockdowns and in turn compelling businesses to expand their scale of operations.

Fourth, on Aug 10, the U.S. Senate passed a bipartisan infrastructure bill of $550 billion in addition to the previously approved funds of $450 billion for five years. Total spending may go up to $1.2 trillion if the plan is extended to eight years. The bill is now headed to the House of Representatives for discussions and vote.

The proposed bill will provide federal money into physical infrastructure projects such as roads, bridges, passenger rails, airports, drinking water and waste-water systems, high-speed Internet, and climate-related infrastructure.

Our Top Picks

We have narrowed down our search to five large-cap (market capital > $20 billion) stocks of the S&P 500 Index. These stocks have strong growth potential for the rest of 2021 and saw positive earnings estimate revisions within the last 30 days. 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 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 is seeing consistent momentum in the non-residential construction market. Demand in non-residential construction markets was strong in the most recent quarter. Nucor’s downstream products unit is benefiting from the continued strength of non-residential construction markets.

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 improved 6% over the last 7 days. The stock price has soared 133.6% year to date.

O'Reilly Automotive Inc. (ORLY - Free Report) operates as a retailer of automotive aftermarket parts, tools, supplies, equipment, and accessories in the United States. The specialty retailer of automotive aftermarket parts is poised to benefit from store openings and distribution centers in profitable regions.

The company has a competitive edge due to a dual market strategy by serving Do-it-Yourself and Do-it-for-Me customers. A customer-centric business model and growing demand for high-quality auto parts are likely to boost O’Reilly’s prospects.

The company has an expected earnings growth rate of 17.4% for the current year. The Zacks Consensus Estimate for its current-year earnings improved 8.1% over the last 30 days. The stock price has rallied 33.4% year to date.

Gartner Inc. (IT - Free Report) operates as a research and advisory company in the United States, Canada, Europe, the Middle East, Africa, and internationally. It operates through three segments: Research, Conferences, and Consulting.

The company offers timely, thought-provoking and comprehensive analysis that is known for its high quality, independence and objectivity. Its research reports have become indispensable tools for various companies across different sectors, strengthening its leading position in the market. It has a large and diverse addressable market with low customer concentration that mitigates operating risks.

The company has an expected earnings growth rate of 60.1% for the current year. The Zacks Consensus Estimate for its current-year earnings improved  21.4% over the last 30 days. The stock price has jumped 92.6% 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. Increasing sales of used vehicles remain a bright spot for the firm.

Store-expansion initiatives and high-quality product offerings are likely to boost CarMax’s prospects. Its omni-channel offerings to improve customer shopping experience are likely to bolster revenues. Ship-to-home next day, curb-side pick-up option, buy online, pick-up in stores and commercial customer ordering are picking pace, driving traffic to the company’s online site.  

The company has an expected earnings growth rate of 54% for the current year (ending February 2022). The Zacks Consensus Estimate for its current-year earnings improved  6.7% over the last 30 days. The stock price has climbed 36.6% year to date.

Pioneer Natural Resources Co. (PXD - Free Report) operates as an independent oil and gas exploration and production company in the United States. The company explores, develops and produces oil, natural gas liquids and gas.

The company’s DoublePoint Energy acquisition has made it one of the biggest producers in the Permian Basin. As a result of the bolt-on acquisition, 97,000 high-quality net contiguous acres has been added to the company’s existing asset base. The deal has boosted the acquirer’s total holding in the basin to more than 1 million net acres.

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 improved  7.7% over the last 30 days. The stock price surged 29.6% year to date.