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Thanks to Wall Street for a Wonderful Rally YTD: 5 Top Picks

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Wall Street started 2021 from where it ended in 2020. Year to date, U.S. stock markets have seen an impressive rally after completing an astonishing 2020 despite being pandemic-ridden. Instead of the technology-driven rally like last year, Wall Street is witnessing a broad-based rally this year — across all segments (large, mid and small caps) and various sectors of the economy. Very few economists and financial analysts had anticipated such a powerful rally at the beginning of this year.

At this stage, it will be prudent to invest in corporate giants that have popped in 2021 with a favorable Zacks Rank and strong upside left. Here are five such stocks — Tesla Inc. (TSLA - Free Report) , Alphabet Inc. (GOOGL - Free Report) , The Home Depot Inc. (HD - Free Report) , Exxon Mobil Corp. (XOM - Free Report) and Lowe's Companies Inc. (LOW - Free Report) .

Impressive 2021 So Far

Wall Street has had a dream run so far this year. The pandemic is not over yet and the resurgence of the Delta variant of coronavirus disrupted U.S. economic recovery this summer. To make the situation worse, inflation is currently at its peak in more than three decades thanks to prolonged global supply-chain bottleneck and acute labor shortage.

Despite these headwinds, year to date, the three large-cap centric indexes — the Dow, the S&P 500 and the Nasdaq Composite — have surged 17%, 24.9% and 22.4%, respectively. The small-cap specific Russell 2000 and S&P 600 Index have advanced 17.9% and 28.1%, respectively. The mid-cap benchmark S&P 400 Index has surged 24.6% in the same period.

Year to date, all 11 broad sectors of the market’s benchmark – S&P 500 Index – are in positive territory. Aside from the technology sector, cyclical sectors like energy, financials, consumer discretionary, materials and industrials have contributed significantly to the S&P 500 rally.

The momentum of U.S. stocks markets is likely to continue and will pave the way for a year-end rally. Here are the reasons:

Government’s Spending Plans

On Nov 15, President Joe Biden signed 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 infrastructure development project will be a major catalyst for the U.S. stock markets in 2022. Various segments of the economy such as basic materials, industrials, telecommunications and utilities will benefit immensely with more job creation for the economy.

On Nov 19, the House of Representatives passed a massive $1.75 trillion social safety net and climate bill proposed by the Biden administration. The bill will now head toward the Senate. Moreover, the White House has put pressure on Congress to quickly pass legislation providing $52 billion to help computer chip manufacturers and ease a shortage of the components vital for a range of industries.

Strong Projections for Holiday Sales

The National Retail Federation has projected November/December retail sales in 2021 to go up 8.5% to 10.5% from 2020. Deloitte forecasts retail sales growth of 7% to 9% during the November-to-January period.

Digital Commerce 360 has estimated that holiday retail sales through all channels, including physical stores, will likely rise 9.4% during the season. KPMG expects 2021 U.S. holiday sales to be 7% higher than last year. Mastercard SpendingPulse forecasts a 7.4% year-over-year rise in U.S. holiday sales.

Solid Growth of U.S. GDP and Corporate Profit

In its latest projection on Nov 17, the Atlanta Fed reported that the U.S. economy will grow by 8.2% in fourth-quarter 2021. U.S. GDP grew 6.4%, 6.7% and 2%, in the first, second and third quarters of this year, respectively.

As of Nov 17, total third-quarter earnings of the market's benchmark — the S&P 500 Index — are projected to jump 40.3% from the same period last year on 17.2% higher revenues. Moreover, in fourth-quarter 2021, total earnings of the S&P 500 index are expected to up 19.4% year over year on 11.1% higher revenues.

Our Top Picks

We have narrowed the search to five U.S. corporate behemoths (market capital > $100 billion) that have skyrocketed more than 50% year to date. These stocks still have more upside left for the rest of 2021 and have seen 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 ResearchImage Source: Zacks Investment Research

Alphabet Inc. has been strongly emphasizing AI techniques and the home automation space that should aid business growth in the long term. Solid momentum across search, advertising, cloud and YouTube businesses aided the results of GOOGL. Further, the growing proliferation of consumer online activities and rising advertiser spending remained as tailwinds.

Alphabet's robust cloud division continues to be the key catalyst. Expanding data centers will continue to bolster its presence in the cloud space. Further, major updates in its search segment are enhancing the search results. Moreover, GOOGL’s mobile search is constantly gaining traction.

Alphabet has an expected earnings growth rate of 84% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5.9% over the last 30 days. The stock price of GOOGL has soared 66.4% year to date.

Tesla Inc. has acquired a substantial market share within the electric car segment. Increasing Model 3 delivery, which forms a significant chunk of TSLA’s overall deliveries, is aiding its top line. Along with Model 3, Model Y is contributing to its revenues.

In addition to increasing automotive revenues, Tesla’s energy generation and storage revenues boost its earnings prospects. The automaker said that its overall deliveries surged 20% in the third quarter from its previous record in the second quarter, marking the sixth consecutive quarter-on-quarter gain.

Tesla has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved 9.7% over the last 30 days. The stock price of TSLA has jumped 57.2% year to date.

The Home Depot Inc. is witnessing significant benefits from the execution of the “One Home Depot” investment plan, which focuses on expanding supply chain facilities, technology investments and enhancement to the digital experience.

Amid the pandemic, customers have been increasingly blending the physical and digital elements of the shopping experience, making the interconnected One Home Depot strategy most relevant. The Home Depot is effectively adapting to the demand for renovations and construction activities, driven by prudent investments. HD is gaining from growth in Pro and DIY customer categories as well as digital momentum.

The Home Depot has an expected earnings growth rate of 28.2% for the current year (ending January 2022). The Zacks Consensus Estimate for current-year earnings has improved 5.3% over the last 7 days. The stock price of HD has surged 53.8% year to date.

Exxon Mobil Corp. made multiple world-class oil discoveries at the Stabroek Block, located off the coast of Guyana. XOM has raised the estimate for discovered recoverable resources from the Stabroek Block to approximately 10 billion oil-equivalent barrels.

Exxon Mobile’s bellwether status and an optimal integrated capital structure, which has historically produced industry-leading returns make it a relatively lower-risk energy sector play. The integrated oil behemoth expects to reduce greenhouse gas emissions by 30% in its upstream business. By the same time, XOM expects to reduce flaring and methane emissions by 40%.

Exxon Mobil has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.2% over the last 7 days. The stock price of XOM has advanced 53.2% year to date.

Lowe's Companies Inc. remains well-positioned to capitalize on the demand in the home improvement market backed by investments in technology, merchandise category and strength in Pro business. Management is committed toward expanding LOW’s market share and boosting the operating margin.

Lowe's Companies new total home strategy, which includes providing complete solutions for various types of home repair and improvement, bodes well. The strategy is an extension of LOW’s retail-fundamentals approach.

Lowe's Companies has an expected earnings growth rate of 33.8% for the current year (ending January 2022). The Zacks Consensus Estimate for current-year earnings has improved 4.2% over the last 7 days. The stock price of LOW has climbed 57% year to date.

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