Wall Street suffered its first major setback of this year on Jan 27. All the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — plummeted 2.1%, 2.6% and 2.6%, respectively. Moreover, the small-cap centric Russell 2000 dropped 1.9% and the mid-cap specific S&P 400 fell 2.5%. This was the worst single-day selloff since Oct 28, 2020.
However, a closer look at yesterday's trading pattern clearly revealed that it was not any major economic, financial or political factor that led to a meltdown. A typical trading practice in which a few key heavily shorted stocks by hedge fund giants were favored by a group of individual investors organized via Reddit’s wallstreetbets forum.
Market's volatility may persist for a few more days as a section of market participants have already started panicking that larger corrections are in the offing. Nevertheless, market's pull down is likely to turn into a good entry point following levels that several economists and financial experts deemed as overvalued.
Five Long-Term Positives for Wall Street
First, President Joe Biden and his administration has decided to meet the Trump administration's goal of immunizing 100 million people in 100 days despite a slower-than-expected rollout of COVID-19 vaccines. This means that the economy should reopen and gradually operate at the pre-pandemic level. Since the lockdowns imposed in March, the U.S. economy is operating at a significant sub-optimal level.
Second, President Joe Biden proposed a new $1.9 trillion coronavirus-aid package called “American Rescue Plan.” The proposed plan will include increasing direct payments to $2,000 from the existing $600 and supplemental unemployment benefits to $400 per week through September. It will provide support to small businesses and aid to state and local governments.
Third, on Jan 26, the IMF raised its global growth forecast for 2021 to 5.5% from 5.2% projected in October 2020. The agency reduced its projected global GDP contraction rate for 2020 to 3.5% from 4.4% in October. On Jan 5, the World Bank reported that the global economy is likely to grow 4% after an estimated 4.3% contraction in 2020.
Both agencies have said that the developed countries will be less affected owing to unprecedented fiscal support and major central banks' decision to pursue ultra-dovish monetary policies.
Fourth, the fourth-quarter earnings season has started with better-than-expected results. Strong overall earnings results and future guidance will support the current stock market valuation. As of Jan 27, the fourth-quarter earnings for the S&P 500 Index were projected to be down 5.6% year over year on 1% higher revenues. This is a notable improvement over the projection of a 7.8% decline in earnings on 0.3% higher revenues at the beginning of the reporting cycle.
Fifth, the Conference Board reported that its Consumer Confidence Index for the month of January improved moderately and came in at 89.3 compared to 87.1 in December which was revised downward from 88.6 reported earlier. The metric surpassed the consensus estimate of 87.5. Notably, the Expectations Index, which is a measure of consumers’ short-term (for the next six months) outlook for income, business and labor market conditions, increased from 87.0 in December to 92.5 in January.
Our Top Picks
At this stage, it will be prudent to invest in large-cap (market capital > $10 billion) stocks that have strong growth potential for 2021 with robust earnings estimate revisions in the last 7 to 60 days, indicating solid business prospects. Each of our picks carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks in the past six months.
FedEx Corp. FDX is the leader in global express delivery services. It provides a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the FedEx brand.
The company has an expected earnings growth rate of 81.5% for the current year (ending May 2021). The Zacks Consensus Estimate for current-year earnings has improved 12.9% over the last 30 days.
Ford Motor Co. F designs, manufactures, markets, and services a range of Ford cars, trucks, sport utility vehicles, electrified vehicles, and Lincoln luxury vehicles worldwide. It operates through three segments: Automotive, Mobility, and Ford Credit.
The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 4.4% over the last 7 days.
Lennar Corp. LEN operates as a homebuilder primarily under the Lennar brand in the United States. It operates through the Homebuilding East, Homebuilding Central, Homebuilding Texas, Homebuilding West, Financial Services, Multifamily, and Lennar Other segments.
The company has an expected earnings growth rate of 8.3% for the current year (ending November 2021). The Zacks Consensus Estimate for current-year earnings has improved 7.6% over the last 60 days.
Hologic Inc. HOLX develops, manufactures, and supplies diagnostics products, medical imaging systems, and surgical products for women's health through early detection and treatment in the United States, Europe, the Asia-Pacific, and internationally. It operates through four segments: Diagnostics, Breast Health, GYN Surgical and Skeletal Health.
The company has an expected earnings growth rate of 80.2% for the current year (ending September 2021). The Zacks Consensus Estimate for current-year earnings has improved 1.8% over the last 30 days.
The Mosaic Co. MOS produces and markets concentrated phosphate and potash crop nutrients in North America and internationally. It operates through three segments: Phosphates, Potash, and Mosaic Fertilizantes.
The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.8% over the last 30 days.
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