After a gap of three months, Wall Street faced severe volatility in February. Soaring yields on long-term U.S. Treasury Notes as investors reallocated funds from safe-haven government bonds to risky equities and market participants’ expectation of an inflationary situation much faster than the Fed projected, triggered the panic button in stock markets in the second half of last month.
However, Wall Street maintained its northbound journey in February. The three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — gained 3.2%, 2.6% and 0.9%, respectively. Moreover, the small-cap specific Russell 2000 Index surged 6.2%. Year to date, the Dow, the S&P 500, the Nasdaq Composite and the Russell 2000 are up 1.1%, 1.5%, 2.4% and 11.5%, respectively.
Meanwhile, the fundamentals of the U.S. economy remain stable. Despite the weaknesses in the labor market, personal income and expenditure have improved and savings are still sky-high. Nationwide deployment of COVID-19 vaccines and the reduction of new coronavirus cases to a great extent should enable the U.S. economy to systematically operate at the pre-pandemic level. Let’s consider some near-term positives.
Catalysts to Drive Wall Street
First, in December 2020, the U.S. Congress has approved $900 billion of the second round of fiscal stimulus that included one-time cash payments of $600 and a special weekly unemployment benefit of $300. The immediate effect of this relief package was felt in January.
Personal income climbed 10%, marking the second-highest monthly increase on record. Personal expenditure rose 2.4%, the first gain in three months and the biggest monthly increase since June 2020. Additionally, the savings rate jumped 20.5% in January from 13.4% in the previous month.
Second, on Feb 27, the House of Representatives passed President Joe Biden’s proposed $1.9 trillion fresh coronavirus-aid package. Per the bill, eligible U.S. citizens will receive a $1,400 check payment plus $1,400 for any dependent. Moreover, the extra amount in unemployment benefits would be increased to $400 a week and the period will be extended up to Aug 29. If Senate passes this bill, it is likely to significantly boost the pent-up demand for U.S. consumers.
Third, in January, the core (excluding volatile food and energy items) PCE index — Fed’s favorite gauge of inflation — rose 1.5%, year over year, which is well below the central bank’s 2% target rate. This supports Fed Chairman Jerome Powell’s repeated confirmation of pursuing ultra-dovish monetary policies for a longer period.
Fourth, on Feb 1, the Congressional Budget Office projected that the economy is expected to reach the pre-pandemic level of February 2020 by mid-2021. Goldman Sachs reported that total savings of U.S. citizens could climb to $2.4 trillion by mid-2021. Reopening of the economy with massive savings is likely to boost personal spending, which in turn should raise the aggregate demand.
Fifth, in its latest prediction on Feb 26, the Atlanta Fed estimated that the U.S. GDP will jump 8.8% in the first quarter of 2021. On Feb 11, the Wall Street Journal reported that economists on average expected U.S. GDP to expand nearly 4.9% this year from 4.3% in January.
Moreover, our latest projection for total earnings of the S&P 500 companies is likely to soar 28.1% year over year on 8.9% higher revenues in 2021 compared with an estimated 16.7% decline in earnings in 2020 on 0.6% lower revenues.
Our Top Picks
We have narrowed down our search to five corporate behemoths (market capital > $100 billion) that suffered a blow in last month’s turmoil. These stocks have strong growth potential for 2021 and witnessed solid earnings estimate revisions in the last 30 days.
Moreover, all these stocks have strong long-term (3-5) growth prospects. Finally, each of our picks carries a Zacks Rank #2 (Buy). You can see
the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
.
The chart below shows the price performance of our five picks year to date.
Apple Inc.
AAPL
has an expected earnings growth rate of 36.3% for the current year (ending September 2021). The company has a long-term growth rate of 11.5% compared with 9.6% of the S&P 500 Index. The Zacks Consensus Estimate for the current year improved 5.9% over the last 30 days. The stock tumbled 11.6% from Feb 4 to Feb 26.
Danaher Corp.
DHR
has an expected earnings growth rate of 18.9% for the current year. The company has a long-term growth rate of 13.7% compared with 9.6% of the S&P 500 Index. The Zacks Consensus Estimate for the current year improved 3.2% over the last 30 days. The stock slid 10.7% from Feb 12 to Feb 26.
Abbott Laboratories
ABT
has an expected earnings growth rate of 38.9% for the current year. The company has a long-term growth rate of 14.1% compared with the S&P 500’s estimated long-term growth rate of 9.6%. The Zacks Consensus Estimate for the current year improved 7.2% over the past 30 days. The stock dropped 6.6% from Feb 12 to Feb 26.
Facebook Inc.
FB
has an expected earnings growth rate of 11.8% for the current year. The company has a long-term growth rate of 19.2% compared with the S&P 500’s estimated long-term growth rate of 9.6%. The Zacks Consensus Estimate for the current year improved 2.5% over the past 30 days. The stock decreased 6% from Feb 16 to Feb 26.
Microsoft Corp.
MSFT
has an expected earnings growth rate of 27.4% for the current year (ending June 2021). The company has a long-term growth rate of 11.9% compared with the S&P 500’s estimated long-term growth rate of 9.6%. The Zacks Consensus Estimate for the current year improved 0.5% over the last 30 days. The stock fell 4.9% from Feb 12 to Feb 26.
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