The U.S. stock markets have been reeling from severe volatility since February primarily owing to inflationary concerns and global trade war fears. In June, trade conflicts escalated to an unprecedented level as countries of European Union and NAFTA treaty also bore the brunt of U.S. tariffs beside China. Additionally, geopolitical conflicts in the Middle East and oil price fluctuations also fueled volatility in the Wall Street.
Despite the presence of several destabilizing elements in the markets, the S&P 500 – stock markets most closely watched index – is in the positive territory year to date. The benchmark index is up almost 2%, in the first half of 2018.
In fact, this stock market barometer – commonly used to gauge broader market movement – has witnessed northbound movement in the last three months. Notably, S&P 500 has gained 0.3%, 2.2% and 0.5% in April, May and June, respectively. At this stage, investment in S&P 500 stocks with favorable Zacks Rank and significant growth potential will be a prudent move.
U.S. Economy Remains Healthy
The U.S. economic growth is at its sturdiest since recession. On Jun 13, the Fed raised forecast for 2018 GDP growth from 2.7% in March to 2.8%. The primary catalyst behind these positive revisions is obviously the direct impact of the tax cuts. The corporate tax rate was recently lowered from 35% to 21%. Moreover, repatriation of income will be taxed 8% to 15.5%, instead of the current 35%.
Strong Labor Market
On Jun 1, the Department of Labor reported that the U.S. economy added 223,000 jobs in May, exceeding the consensus estimate of 190,000. The unemployment rate declined from 3.9% in April to 3.8% in May, its lowest in 18 years. The decline in the unemployment rate indicates the extent to which the labor market has tightened. Moreover, the Fed has reduced 2018 unemployment rate estimate to 3.6% from 3.8% in March.
Solid Manufacturing Data
On Jun 2, the Institute for Supply Management reported that the U.S. manufacturing index rose to 60.2% in June from 58.7% in May. The June reading was highest in last four months as well as better than the consensus estimate of 58.4. The manufacturing sector accounts for nearly 12% of the U.S. economy. Notably, readings over 50% indicate more companies are expanding instead of shrinking.
Robust Earnings Momentum
Second-quarter earnings results have been exhibiting strong momentum so far. Total earnings are expected to be up 19% from the same period last year on 8.2% higher revenues. It is to be noted that the first quarter witnessed the highest quarterly earnings growth pace in seven years. For full-year 2018, total earnings for the S&P 500 index are anticipated to be up 20.2% on 6.3% higher revenues. (Read More: Good Start to Q2 Earnings Season)
Our Top Picks
Solid macro-economic fundamentals, government’s tax reform and deregulation proposals along with sustained strong earnings performance are major tailwinds for the U.S. economy. Such factors are unlikely to disappear in the near term. At this stage, investment in S&P 500 stocks with strong earnings momentum will be lucrative. However, picking winning stocks can be a difficult task.
This is where our VGM Score comes in handy. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.
We have narrowed down our search to five stocks, each of which has a Zacks Rank #1 (Strong Buy) and a VGM Score A or B. You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our five picks year to date.
Anadarko Petroleum Corp. APC is one of the world's largest independent oil and gas exploration and production companies. Most of the company's production is in the United States and the remainder is from Algeria. It carries a VGM Score of A. The company has expected earnings growth of 251% for current year. The Zacks Consensus Estimate for the current year has improved by 7.2% over the last 30 days.
HollyFrontier Corp. HFC is engaged in refining petroleum. It produces and markets gasoline, diesel, jet fuel, asphalt, heavy products and specialty lubricant products. It carries a VGM Score of A. The company has expected earnings growth of 153.5% for current year. The Zacks Consensus Estimate for the current year has improved by 10.9% over the last 30 days.
Micron Technology Inc. MU is one of the world's leading providers of advanced semiconductor solutions. Micron manufactures DRAMs, NAND flash memory, CMOS image sensors and memory modules. It carries a VGM Score of A. The company has expected earnings growth of 136.3% for current year. The Zacks Consensus Estimate for the current year has improved by 1.6% over the last 30 days.
ConocoPhillips COP is a major global oil exploration and production (E&P) company with operations worldwide. It carries a VGM Score of B. The company has expected earnings growth of 585% for current year. The Zacks Consensus Estimate for the current year has improved by 7.3% over the last 30 days.
NetApp Inc. NTAP provides a full range of hybrid cloud data services that simplify management of applications and data across cloud and on-premises environments to accelerate digital transformation. It carries a VGM Score of B. The company has expected earnings growth of 16.7% for current year. The Zacks Consensus Estimate for the current year has improved by 2% over the last 30 days.
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