After a blockbuster start to 2018, Wall Street is caught in a vicious circle of trading as volatility and uncertainty have taken the center stage. While a combination of factors like solid earnings, upbeat economic data and new tax legislation have fueled the rally, inflation fears, surge in yields, tech selloff, and most specifically tariff tantrums continue to weigh on stock returns.
Below we discuss some of the events that dominated the headlines in the first half and influenced the market:
Technology Remains a Hot Spot
The technology sector has experienced huge swings driven by a slew of negative news from many big names, and fears of a global trade war. In particular, escalating trade tension between the United States and other major trading partners, especially China, has hurt the technology stocks lately given their large exposure to the world’s second-largest economy. However, the sector remained investors darling in the first half, driven by the astounding surge in FAANG stocks, solid corporate earnings and encouraging sector fundamentals.
Despite twists and turns, technology is the top-performing sector of the first half with the S&P Technology Index gaining in double digits. Among the large-cap stocks, Twitter Inc. (TWTR - Free Report) having a Zacks Rank #3 (Hold) and a VGM Score of B emerged as the winner, gaining 82%. The Zacks Consensus Estimate for 2018 has moved up from 59 cents to 75 cents over the past three months and has estimated earnings growth of 70.45%.
Fed Raises Rate
The Fed has raised interest rates twice this year, once in March and the second time in June. It also unveiled a hawkish view in the future path trajectory with two more rate hikes in the second half given an improving economy, rising inflation and a strengthening job market. As such, cyclical sectors like financials, industrials and consumer discretionary are expected to benefit from a rising-rate environment.
Some of the top-ranked stocks from these spaces saw a huge surge in their share price from a year-to-date look. These include First BanCorp. (FBP - Free Report) up 50.8%, DMC Global Inc. (BOOM - Free Report) up 80% and Town Sports International Holdings Inc. (CLUB - Free Report) up 142.3%. The trio has a Zacks Rank #1 (Strong Buy) or 2 (Buy), suggesting their continued outperformance in the months ahead. Further, these stocks are expected to generate solid earnings growth this year (FBP - 14%, BOOM - 1,168.75% and CLUB – 211.76%). You can see the complete list of today’s Zacks #1 Rank stocks here.
Trade war fears surfaced in March when Trump levied a 25% tariff on steel and aluminum imports on countries around the world. The action has prompted a retaliatory action from U.S. allies and tit-for-tat import tariffs.
The turmoil intensified in June when Trump unveiled the list of Chinese goods worth $50 billion targeted for a 25% tariff, leading to retaliation from China with duties of “the same scale and strength.” Further, the dispute with China escalated after news that Trump is seeking to curb many Chinese companies from investing in U.S. technology firms and block additional technology exports to China. This would come on the top of tariff plan of up to $400 billion on Chinese goods if Beijing retaliates again. That said, semiconductor stocks took a huge beating this month, with Amtech Systems Inc. (ASYS - Free Report) declining the most by 37.6%. The stock has a Zacks Rank #3 and a VGM Score of A.
The trade dispute with the European Union (EU) also deepened last week after Trump tweeted that he would impose another 25% tariff, targeting imported autos from the European Union. The response came following EU’s threat of 25% duties on $3.2 billion worth of American goods exported to the 28-member bloc, starting Jun 22, against U.S. tariffs on European steel and aluminum.
The worsening tariff talks could ignite a global recession, compelling investors to take flight to safety. As a result, gold stocks, which often act as safe haven, have the potential to move upward dodging the negative impact from the rate hikes. Kirkland Lake Gold Ltd. (KL - Free Report) having a Zacks Rank #2 and a Growth Score of A looks exciting pick. It surged 32.9% in the first half.
Crude oil hits its highest level since November 2014 thanks to tightening supply and rising demand. OPEC output cut deal, falling production in Venezuela and concerns over Iran sanctions have led to higher price of oil though production in United States is surging. Unplanned supply disruptions from Canada to Libya also added to the strength in oil price. This has resulted in a strong rally in energy stocks. Profire Energy Inc. (PFIE - Free Report) is among the top-ranked stocks that soared more than 100%. The stock jumped 139.6% in the first half, and carries a Zacks Rank #2 and a VGM Score of B. It has an estimated earnings growth of 122.22% for this year.
Small Caps Outperform
Small-cap stocks are outperformers and have been on the hottest run in more than a decade and a half. This is because these stocks are well insulated from international headwinds including trade war fears, tariff concerns and geopolitical tensions, and are considered safe plays if any political issue or economic turmoil creeps into the picture. Additionally, encouraging domestic economic fundamentals and the strength in U.S. dollar, which makes domestic goods more expensive overseas, also supported the small-cap surge.
While there have been winners in several corners of the small-cap space, Turtle Beach Corporation (HEAR - Free Report) has climbed the most with more than 1000% gains. The Zacks Consensus Estimate for 2018 has moved up from a loss of 12 cents to earnings of 97 cents over the past three months and has an estimated earnings growth of 504.17%. The stock has a Zacks Rank #1 and a VGM Score of A.
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