Market Ignores Inflation as S&P 500 Hits a New High: 5 Picks

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On Jun 10, the Department of Labor reported that the consumer price index (CPI) — popularly known as household inflation — jumped 5% year over year in May, its highest since September 2008. The core CPI (excluding volatile food and energy items) climbed 3.8% in May, marking the largest monthly gain since 1992.

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Yet, the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — rose 0.1%, 0.5% and 0.8%, respectively. The CBOE VIX — market’s best-recognized fear gauge — plummeted 10% to close at 16.10, marking its lowest close since Feb 20, 2020, just before the global outbreak of the deadly coronavirus.

Notably, the market’s benchmark — the S&P 500 Index — touched a fresh all-time high of 4,249.74, outpacing its previous high of 4,238.04 recorded on May 7. The index finally closed at 4,239.18, marking another closing high.

The broad-market index took 30 trading days to post a new high. The index was hovering around 1% within its previous all-time high for the last 15 trading days. However, it failed to make a breakthrough due to day-to-day market fluctuations on investors’ concerns over an impending inflation. Surprisingly, it happened on the day when a record-high CPI data was reported.

Inflation May Not Be Alarming

The Fed, which will conduct its next FOMC meeting on Jun 15-16, has reiterated so far that any inflation in 2021 will be transitory. First, the core CPI data for April and May and the core PCE price index for April, which look alarming, could be due to an extremely low base last year.

The U.S. economy was under complete shutdown during April-May last year that distorted the base prices for year-over-year inflation calculation. Prices of many final products, especially those of the services sector, are merely returning to their pre-pandemic levels from the coronavirus-induced troughs.

Second, the U.S. economy is still reeling under massive fiscal stimulus injected from March 2020 to March 2021. This week, the Department of Labor reported that a record-high 9.3 million jobs were opened in April due to shortage of labor. Yet, around 15.34 million Americans have received unemployment benefits from eight separate state and federal programs for the week  ended May 22.

In order to raise the labor force participation rate, as many as 23 states have decided to terminate $300 weekly unemployment benefits as soon as Jun 12, earlier than the original schedule on Sep 6. The termination of stimulus may contain higher personal expenditure to some extent. Higher labor force participation will reduce wage rate and producers’ input costs.

Third, the supply-chain disruption during the pandemic-era is expected to settle gradually as businesses are looking for new affordable sources. Commodity prices that have skyrocketed recently due to strong pent-up demand for final products will also settle down once demand normalizes.

Our Top Picks

We have narrowed down our search to five large-cap (market capital > $ 15 billion) S&P 500 stocks that drove the benchmark to a fresh all-time high on Jun 10. These stocks have strong growth potential for 2021 and witnessed robust earnings estimate revision within the last 7 to 30 days, indicating solid business prospects. Each of our picks sports 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 from May 8 to Jun 10.

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NVIDIA Corp. NVDA is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or GPU. Over the years, the company’s focus has evolved from PC graphics to AI- based solutions that now support high-performance computing, gaming and virtual reality platforms.

The company has an expected earnings growth rate of 58.4% for the current year. The Zacks Consensus Estimate for the current year has improved 16.4% over the last 30 days. The stock price has jumped 17.7% from May 8 to Jun 10.

Target Corp. TGT operates as a general merchandise retailer in the United States. It offers beauty and household essentials, food assortments, including perishables, dry grocery, dairy, and frozen items; and apparel, accessories, home decor products, electronics, toys, seasonal offerings, and other merchandise.

It has an expected earnings growth rate of 25.6% for the current year (ending January 2022). The Zacks Consensus Estimate for current-year earnings has improved 36.4% over the last 30 days. The stock price has climbed 7.9% from May 8 to Jun 10.

Nucor Corp. NUE is a leading producer of structural steel, steel bars, steel joists, steel deck and cold-finished bars in the United States. It operates through three segments: Steel Mills, Steel Products, and Raw Materials.

The company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for its current-year earnings has improved 3.6% over the last 30 days. The stock price has surged 7.7% from May 8 to Jun 10.

Tyler Technologies Corp. TYL provides integrated information management solutions and services for the public sector in the United States and internationally. It operates in two segments, Enterprise Software, and Appraisal and Tax.

The company has an expected earnings growth rate of 21.2% for the current year. The Zacks Consensus Estimate for its current-year earnings has improved 17.2% over the last 7 days. The stock price has advanced 6.2% from May 8 to Jun 10.

Expeditors International of Washington Inc. EXPD is engaged in the business of global logistics management, including international freight forwarding and consolidation, for both air and ocean freight in the Americas, North Asia, South Asia, Europe, the Middle East, Africa, and India.

The company has an expected earnings growth rate of 25.3% for the current year. The Zacks Consensus Estimate for the current year has improved 5.6% over the last 30 days. The stock price has gained 5.7% from May 8 to Jun 10.

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