Wall Street performed exceptionally well in the first half of 2019 in a complete turnaround from dismal 2018. The S&P 500 Index recorded the highest gain in 22 years.
However, the economy is not out of the woods. Lingering trade conflict between the United States and China, fears of further trade wars with the EU and Japan-South Korea, and various geopolitical issues such as Iran and Brexit are taking a huge toll on the global economy and can flare up market volatility anytime. Several major central banks, including the Fed, have adopted a dovish stance anticipating tough times.
Uncertainty on Trade Deal
The U.S.-China trade war, which started in March 2018, headed for a likely solution in 2019 but abruptly ended in May after President Trump blamed China of backtracking from earlier commitments. So far, the United States has imposed 25% tariffs on $250 billion Chinese goods and China has retaliated by levying 25% tariffs on $160 billion of U.S. exports. Although the two sides renewed talks to end the impasse, a trade deal is not yet on the horizon.
Moreover, the Trump administration has threatened to impose 25% tariffs on another $4 billion of goods from the European Union due to escalation of aerospace related subsidies. Recently, Asian giants Japan and South Korea also got involved in trade war with each other.
Tepid Economic Data Worldwide
In the United States, several tepid economic data were released in the past two weeks. The ISM manufacturing index in June fell to 51.7 from 52.1 in May. The ISM services index for June dropped to 55.1 from 56.9 in May. U.S. factory orders declined 0.7% in May. Construction spending decreased 0.8% in May. Durable goods orders declined 1.3% in May.
Meanwhile, IHS Markit reported that manufacturing PMI of China, Eurozone, the U.K. and Russia fell below 50, hinting at contraction. In June, the World Bank reduced its global growth projection to 2.6% for 2019. The IMF also reduced its global growth rate to 3.5%.
Central Banks’ Signal Dovish Monetary Stance
On Jun 18, ECB chairman Mario Draghi gave a strong signal that if Eurozone’s economic condition deteriorates, the ECB will inject more stimulus either in the form of interest rate cut or further asset purchase.
On Jun 19, Fed chair Jerome Powell removed the term “patient’’ from the FOMC minutes and added that “the FOMC will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion." Investors are considering a rate cut at least by 25 basis points in July and one or two more cuts in the rest of this year.
China’s central bank extended around $40 billion to some commercial banks in April via its targeted medium-term lending facility as it looks to provide struggling smaller business with a steady stream of affordable financing. Meanwhile, Reserve Bank of Australia decided to inject more quantitative easy policies in order to generate growth in its GDP.
Our Top Picks
Under these circumstances, it will be prudent to invest in those stocks that skyrocketed in the past three months with a favorable Zacks Rank and are poised to beat on second-quarter earnings. We have narrowed down our search to five such stocks, each sporting a Zacks Rank #1 (Strong Buy) and having positive Earnings ESP. You can see the complete list of today’s Zacks #1 Rank stocks here.
Our research shows that for stocks with the combination of a Zacks Rank #3 (Hold) or better and a positive Earnings ESP, the chance of an earnings beat is as high as 70%. These stocks are expected to soar close on the heels of earnings release irrespective of already solid gains in the past three months.
RenaissanceRe Holdings Ltd. RNR provides reinsurance and insurance products in the United States and internationally. The company operates through Property, and Casualty and Specialty segments.
RenaissanceRe has an Earnings ESP of +30.48% for the current quarter. The company has expected earnings growth of 39.6% for the current year. The Zacks Consensus Estimate for the current year has improved 1% over the last 30 days. The stock has surged 26.8% in the past three months. RenaissanceRe Holdings is expected to release earnings results on Jul 23, after the closing bell.
Chipotle Mexican Grill Inc. CMG operates Chipotle Mexican Grill restaurants, which serve a focused menu of burritos, tacos, and burrito bowls (a burrito without the tortilla) and salads made using fresh ingredients.
Chipotle has an Earnings ESP of +7.34% for the current quarter. The company has expected earnings growth of 43.6% for the current year. The Zacks Consensus Estimate for the current year has improved 0.1% over the last 30 days. The stock has gained 4.2% in the past three months. Chipotle Mexican Grill is expected to release earnings results on Jul 23, after the closing bell.
Legg Mason Inc. LM provides investment management and related services to company-sponsored mutual funds and other investment vehicles including pension funds, foundations, endowments, sovereign wealth funds, insurance companies, private banks, family offices, individuals as well as to global, institutional, and retail clients.
Legg Mason has an Earnings ESP of +9.76% for the current quarter. The company has expected earnings growth of 963.2% for the current year. The Zacks Consensus Estimate for the current year has improved 0.9% over the last 30 days. The stock has surged 18.9% in the past three months. Legg Mason is expected to release earnings results on Jul 24.
Roper Technologies Inc. ROP designs and develops software, and engineered products and solutions worldwide. The company operates in four segments: Application Software; Network Software & Systems; Measurement & Analytical Solutions; and Process Technologies.
Roper has an Earnings ESP of +0.50% for the current quarter. The company has expected earnings growth of 10% for the current year. The Zacks Consensus Estimate for the current year has improved 0.9% over the last 30 days. The stock has climbed 8.7% in the past three months. Roper Technologies is expected to release earnings results on Jul 25, before the opening bell.
Arconic Inc. ARNC engineers, manufactures and sells lightweight metals worldwide. The company operates in three segments --- Engineered Products and Solutions, Global Rolled Products and Transportation and Construction Solutions.
Arconic has an Earnings ESP of +8.72% for the current quarter. The company has expected earnings growth of 36.8% for the current year. The Zacks Consensus Estimate for the current year has improved 3.3% over the last 30 days. The stock has surged 28.6% in the past three months. Arconic is expected to release earnings results on Jul 30.
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