U.S. stocks, after peaking in the first month of the year, were caught in a web of uncertainty and volatility throughout the first half. Inflationary pressures and the resultant anticipation of an aggressive increase in interest rates led to a sharp selloff in February that was followed by a tech turmoil in March.
After that, Trump’s imposition of steel and aluminum import tariffs in March ignited fears of a trade war and retaliation from most countries across the world. The relation with China got worse in recent months after both Washington and Beijing announced tariffs on billions of dollars’ worth of imports that are likely to take effect on Jul 6. The two world’s largest economies have threatened more import duty on billions of dollars that could trigger a global recession hurting American companies from many industries.
Though tariff tantrums are a huge drag on big U.S. exporters and large-cap stocks given their substantial foreign exposure, it is benefiting the small caps. This is especially true as small-cap stocks are well insulated from international headwinds, including trade war fears and tariff concerns, and are considered safe and better plays if any political issue or economic turmoil creeps into the picture.
Big technology names have also shrugged off escalating trade war fears lately with the so-called FANG stocks — Facebook FB, Amazon AMZN, Netflix NFLX and Alphabet GOOGL — soaring to all-time highs. This is because their business is largely immune to trade and tariffs given their leadership and strength in their key industries.
As such, the tech-heavy Nasdaq Composite has been the outperformer midway through 2018 gaining more than 9% while the Dow Jones logged the worst first-half performance since 2010, losing 2%. The S&P 500 rose 1.7% and small-cap stocks, as indicated by the Russell 2000, climbed 7% in the first half.
Among the positive factors that led to higher stock prices are strong corporate profits and rounds of upbeat data, which justify strong economic growth. The economy has expanded for nine years and the United States has now entered its second-longest expansion phase since 1785. This is primarily thanks to higher consumer spending, rising consumer confidence, still-low borrowing cost, growing wages, and solid hiring.
Additionally, higher oil prices have lent huge support to the stock market with a strong rally in energy stocks. U.S. crude oil gained more than 20% in first-half 2018 buoyed by soaring demand, reducing supplies from Venezuela, Libya and Canada, threats of supply disruption from Iran as result of sanctions, and of course the historic output cut deal between the OPEC, Russia and other producers.
Further, a massive $1.5-trillion tax cut will create an economic surge, boosting job growth and reflation trade. It will further accelerate earnings, leading to increased dividend and buyback activities. The tax repatriation will allow companies to bring offshore cash back home, paving the way for increased mergers and acquisitions. A combination of all these factors bodes well for the stock market.
All these positive developments led to a few winners in many corners of the equity space. Of these, we highlight the top eight performing stocks of 1H2018. These stocks not only crushed the broad market returns, but also have the potential to outperform in the second half.
So what makes these a cut above the rest? First, a Zacks Rank of #1 (Strong Buy) or 2 (Buy). Second, a solid industry rank and a VGM Style Score of B or better. This is quite a combination to look out for in stocks, especially for investors beefing up their portfolio in the second half given volatility and uncertainty. You can see the complete list of today’s Zacks #1 Rank stocks here.
Take a quick look at the best 1H2018 stocks and their key metrics in the table below:
Clearly, stocks in the technology and energy spaces have outperformed per our criteria and could remain the two frontrunners in the nine-year old bull market, which is ruffled by trade tariff threats, mid-term election and geopolitical tension.
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