Large caps may have lost to small caps this year on trade war tensions, but things are probably on the verge of changing. Investors should note that after nagging four-month long trade war talks, investors seem to have knocked down the real enactment in July.
U.S. stock futures are trading at a five-month high currently. Three big ETFs including SPDR S&P 500 ETF (SPY - Free Report) , SPDR Dow Jones Industrial Average ETF (DIA - Free Report) and Invesco QQQ ETF (QQQ - Free Report) have added about 0.9%, 1.2% and 1.5% in the past five days (as of Jul 12, 2018), respectively, while the small-cap ETF iShares Russell 2000 ETF (IWM - Free Report) has lost 0.8%. This is in stark contrast to 3.2% year-to-date gains in SPY and 9% advancement in IWM.
What Hit Large Caps This Year?
In the first half, the two countries targeted $50 billion of each other’s goods for tit-for tat tariffs. But now, the situation has deteriorated with President Trump’s latest threat of 10% tariffs on further $200 billion in products imported from China. Plus, the recent slowdown in some developed economies also contributed to the subdued performance in large caps.
Trade War Fear Seems Oversold; Economic Data Points Upbeat
No matter how U.S.-China trade progresses, we believe tensions are almost priced-in at the current level. Also, Chinese and U.S. officials have lately hinted at the prospect of recommencing talks over trade between the two countries.
Investors shifted focus to upbeat U.S. economic data points from the trade war. U.S. employers added 213,000 new jobs in June, after an upwardly revised 244,000 in May. The number breezed past market expectations of 195,000. The momentum in the manufacturing sector is equally upbeat with the sector logging the strongest expansion in four months in June (read: Winning & Losing Sector ETFs From June Jobs Data).
If this was not enough, U.S. retail sales rose the maximum in six months in May. Sales increased 0.8% sequentially in the month, after the upwardly revised 0.4% growth in April, handily beating market expectations of a 0.4% rise.
Q2 on the Way to Show Strongest Earnings Since 2010?
Earnings for the S&P 500 index are expected to be up 19.1% in Q2 on 8.2% higher revenues, per the Earnings Trends issued on Jul 11. FactSet predicts that the second quarter should see earnings growth of more 20%. If it happens, second-quarter earnings will be on its way to set a record after 2010 (read: These Sector ETFs Are Set to Sizzle on Earnings).
Investors should also note that the present earnings cycle for the S&P 500 started from 2009, when the U.S. economy came out of its last recession. By now, the growth momentum should have slowed and reached the historical normalized pace of the mid-single-digits’ level. But a double-digit growth rate of expected Q2 earnings is the result of the tax reform, per the Earnings Trends.
The Atlanta Fed estimates real GDP growth in the second quarter of 2018 at 3.8%, much higher than 2.0% rate recorded in Q1. The combination of these factors should continue to boost growth stocks.
Why Large Cap?
Having said this, while all sorts of growth ETFs may scale higher, large caps are likely to enjoy some special benefits. This is because, large caps have been subdued this year on trade concerns, resulting in cheaper valuation.
Secondly, large-cap stocks perform better in a falling dollar environment as these have wide foreign exposure. Along with many analysts, we too believe that “tariffs, rising debt and deficits” may put a downward pressure on the greenback. This could bode well for large-cap stocks.
Given this, several large-cap growth ETFs hit a 52-week high on Jul 12, 2018 and may continue to outperform ahead. Below we highlight a few of them (read: Top Large-Cap Growth ETFs of 2017).
FI Enhanced Large Cap Growth ETN (FBGX - Free Report) ) – Up 2.35% on Jul 12
Nasdaq QQQ ETF (QQQ - Free Report) ) – Up 1.72%
Russell 1000 Growth Vanguard (VONG - Free Report) ) – Up 1.31%
S&P 500 Growth ETF Vanguard (VOOG) – Up 1.30%
Russell Top 200 Growth iShares ETF (IWY)– Up 1.25%
SPDR S&P 500 Growth Portfolio ETF (SPYG - Free Report) ) – Up 1.25%
iShares S&P 500 Growth ETF (IVW - Free Report) ) – Up 1.23%
iShares Morningstar Large-Cap Growth ETF (JKE - Free Report) – Up 1.18%
Schwab US Large-cap Growth ETF (SCHG - Free Report) – Up 1.04%
Invesco Russell Top 200 Pure Grow Portfolio (PXLG - Free Report) – Up 0.88%
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