By now, the year 2018 can easily be credited to trade tensions. In the first half, the two countries targeted $50 billion of each other’s goods for tit-for tat tariffs. But now, the situation has deteriorated with President Trump’s latest threat of 10% tariffs on further $200 billion in products imported from China.
Trump has even gone on to say that if Beijing continues to retaliate, the United States will impose a total tariff on $550 billion in Chinese goods – an amount that was not even the total U.S. import from China last year.
Now, if any broader investing spectrum falls prey to such political tensions, then that will be the large caps. Though the large-cap index S&P 500 started 2018 on a better footing than the Russell 2000, the game started changing from mid-March. President Trump’s protectionist agenda and the resultant trade war fears started weighing on large-cap stocks.
Trade War Fear Seems Oversold, Time to Look at Better Data Points?
Investors should note that after a nagging four-month trade war talks, investors seem to be ignoring the reality in July. U.S. stock futures are trading at a five-month high currently. This is especially true given that Chinese and U.S. officials have lately hinted at the prospect of recommencing talks over trade between the two countries.
Three big ETFs including SPDR S&P 500 ETF (NYSEARCA:SPY), SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) and Invesco QQQ ETF (NASDAQ:QQQ) have added about 0.9%, 1.2% and 1.5%, respectively, in the past five days (as of Jul 12, 2018).
Investors also shifted focus to upbeat U.S. economic data points from the trade war. U.S. employers added 213,000 new jobs in June, after an upwardly revised 244,000 in May. The number breezed past market expectations of 195,000. The momentum in the manufacturing sector is equally upbeat with the sector logging the strongest expansion in four months in June.
If this was not enough, U.S. retail sales rose the maximum in six months in May. Sales increased 0.8% sequentially in the month, after an upwardly revised 0.4% growth in April, handily beating market expectations of a 0.4% rise.
Earnings Growth Momentum Solid
Earnings for the S&P 500 index are expected to be up 19.1% in Q2 on 8.2% higher revenues, per the Earnings Trends issued on Jul 11. Investors should note that the present earnings cycle for the S&P 500 started from 2009, when the U.S. economy came out of its last recession.
By now, the growth momentum should have slowed and reached the historical normalized pace of the mid-single-digits’ level. But an expected double-digit growth rate for Q2 earnings is the result of the tax reform, per the Earnings Trends.
The Atlanta Fed estimates real GDP growth in the second quarter of 2018 to be 3.8%, much higher than the 2.0% rate recorded in Q1. The combination of these factors should continue to boost growth stocks.
Why Large Caps?
Having said this, while all sorts of growth ETFs may scale higher, large-caps are likely to enjoy some special benefits. This is because, large-caps have been subdued this year on trade concerns, resulting in cheaper valuation.
Secondly, large-cap stocks perform better in a falling dollar environment as these have wide foreign exposure. Along with many analysts, we too believe that “tariffs, rising debt and deficits” may put a downward pressure on the greenback. This could bode well for large-cap stocks.
Given this, we have highlighted a few top-ranked, large-cap growth stocks for investors. These large-cap stocks have a Zacks Rank #1 (Strong Buy) and Growth score of A.
NetApp Inc. (NASDAQ:NTAP)
It is the data authority for hybrid cloud and hails from a top-ranked Zacks industry (top 20%).
It is a major global exploration and production (E&P) company with operations all over the world. It is from a top-ranked Zacks industry (top 11%).
Twitter Inc. (NYSE:TWTR)
This social media company belongs to a top-ranked Zacks industry (top 36%).
Western Digital Corporation (NASDAQ:WDC)
It provides a full portfolio of compelling and high-quality storage. It belongs to a top-ranked Zacks industry (top 20%).
Occidental Petroleum Corporation (NYSE:OXY)
It is an international oil and gas exploration and production company with operations in the United States, Middle East and Latin America. The stock is placed in a top-ranked Zacks industry (top 11%).
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