The Business Services sector has performed well compared with the benchmark index year to date. The sector has gained 10.6%, which compares favorably with the Zacks S&P 500 Composite’s rally of 4.4% in the said time frame.
The outlook of the business services sector is highly dependent on the health of the broader economy. The overall U.S. economy is benefiting from Trump administration’s business-friendly approach, including tax cuts, higher spending and repeal of regulations. This has improved the employment scenario, and aided manufacturing and non-manufacturing activities.
Robust Manufacturing & Non-Manufacturing Activity
The business services sector is gaining strength because it is firmly tied to manufacturing and non-manufacturing activities.
The manufacturing sector grew for the 22nd consecutive month, reporting a PMI of 60.2% in June. The growth was driven by increased activity across production, supplier deliveries, inventories, customers’ inventories and export and import orders. Of the 18 manufacturing industries, 17 reported growth in June.
Additionally, the manufacturing gauge logged its biggest gain in the last four months and surpassed the average PMI level of 59.0% in the past year.
As far as the non-manufacturing sector is concerned, NMI was 59.1% in June, recording the 101st consecutive month of expansion. This expansion was driven by continued increase in business activity, new orders and new export orders. Out of the 18 non-manufacturing industries, 17 reported growth in June.
The non-manufacturing gauge also reported its highest gain in the past four months, higher than the average NMI level of 57.9% in the past year.
Highest Jobs Additions in June
Per the latest data from U.S. Bureau of Labor Statistics, the professional and business services sector reported the highest job additions in June among all industries. The sector added 50,000 jobs in June and 521,000 in the past 12 months. The figures show improvement from the previous month’s addition of 31,000 jobs and 483,000 jobs in a year.
Other significant gainers include manufacturing (36,000), healthcare (25,200), leisure & hospitality (25,000), education (18,900) and construction (13,000). Retail however lost 21,600 jobs.
The overall economy added 213,000 jobs in June, registering growth of 2.4 million in the past year. Monthly job additions (revised) have averaged 211,000 in the past three months.
GDP Projections Up
Despite declining to an annualized pace of 2% in the first quarter of 2018, U.S. GDP is expected to register 3.8% growth in the second quarter, per the Atlanta Federal Reserve. The BlueChip economists’ estimate an average GDP growth of 3.5% in the second quarter. Moreover, U.S. GDP is expected to register 2.93% growth for full year 2018, per a report by statista.
Given this bullish estimate, we believe the economy is likely to rebound in the coming quarters. Income tax cuts and increased government spending are expected to push annual economic growth to the 3% target.
What’s in Store for the Sector in Q2?
The Business Services sector is expected to register earnings growth of 15.4% on 5.4% higher revenues in second-quarter 2018, per the latest Earnings Preview report. Additionally, the sector is one of the 11 (out of the total 16) Zacks sectors expected to register double-digit earnings growth in second-quarter 2018.
Total second-quarter 2018 earnings are expected to be up 19% on 8.2% higher revenues.
Top Four Gainers in June
With the help of the Zacks Stock Screener, we have zeroed in on four promising stocks from the sector, which have grown in June and have the potential to rise further in the second half of the year. These stocks have a favorable Zacks Rank #1 (Strong Buy) or 2 (Buy) and a solid expected earnings growth rate for the current year. The stocks have also witnessed upward estimate revisions in the last 30 days and gained more than 4% in June. You can see the complete list of today’s Zacks #1 Rank stocks here.
Let’s have a look at the top four gainers:
Based in California, Korn/Ferry International (KFY - Free Report) is the world's leading and largest executive recruitment firm with the broadest global presence in the executive recruitment industry.
Currently, it sports a Zacks Rank #1. The company’s expected earnings growth rate for the current year is 18.4%. The Zacks Consensus Estimate for the current year improved 5.6% in the last 30 days. The stock rallied 13.3% last month.
Based in Florida, Advanced Disposal Services, Inc. (ADSW - Free Report) is a provider of non-hazardous solid waste collection, transfer, recycling, and disposal services.
It has a Zacks Rank #2. The company has expected earnings growth rate of 34% for the current year. The Zacks Consensus Estimate for the current year moved up 5% in the last 30 days. The stock rallied 6% in June.
Based in Maine, WEX Inc. (WEX - Free Report) provides payment processing and business solutions across a wide spectrum of sectors, including fleet, travel and healthcare.
It has a Zacks Rank #2. The company has expected earnings growth rate of 48.4% for the current year. The Zacks Consensus Estimate for the current year moved up 0.1% in the last 30 days. The stock rallied 8.3% last month.
Based in New York, Paychex, Inc. (PAYX - Free Report) is one of the leading providers of payroll, human resource, and employee benefits outsourcing services to small- to medium-sized businesses.
It has a Zacks Rank #2. The company has expected earnings growth rate of 10.9% for the current year. The Zacks Consensus Estimate for the current year moved up 2.5% in the last 30 days. The stock rallied 4.2% last month.
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