Seven months ago, global financial markets were in disarray. Rates were rushing higher as the Federal Reserve was tightening monetary policy against the backdrop of record-high corporate debt levels and slowing economic expansion. Trade tensions were running high. The yield curve had inverted. Recession fears were everywhere. Stocks were in free fall. The S&P 500 dropped 20% in a matter of months, and dipped below 2,350.
Today, everything has changed.
The Fed has considered going into rate-cut mode. Economic expansion globally has stabilized. Trade tensions have cooled. The all-important 10-2 spread on the yield curve remains positive. Recession fears have disappeared. Stocks are in rally mode. Year-to-date, the S&P 500 is up almost 21%, and for the first time ever in early July, the index peaked above 3,000.
That’s a long and impressive journey from the 2,350 low on Christmas Eve 2018. It’s worth taking a closer look at to understand just exactly what is going to happen to stocks going forward.
One way to take a closer look: examine the stocks driving this big market rally, and see if they have sufficient firepower to keep the rally alive for the next several months.
With that in mind, let’s take a look at 10 $100 billion-plus market cap stocks which are all up more than 35% year-to-date, and see where these red hot large cap stocks are going next.
Hot Stocks Driving The Market Higher: Facebook (FB)
Market Cap: $575 Billion
YTD Gain: 49.8%
How It Got Here: Social media giant Facebook (NASDAQ:FB) shook off data privacy concerns in 2019, and it reported continued robust user and digital ad revenue growth. At the same time, margins are starting to stabilize as big initial investments in data security are phasing out. Facebook is also pivoting into commerce, and in so doing, unlocking an entirely new revenue stream which could potentially become as big as the digital ad revenue stream. Net net, the growth narrative here has improved dramatically in 2019, and in response, FB stock has rallied around 50% year-to-date.
Where It’s Going Next: Facebook stock will stay in rally mode for the foreseeable future. The valuation remains reasonable at 22 times forward earnings for what is projected as 20%-plus revenue growth over the next several years. Further, the commerce growth catalyst has yet to even materialize, and won’t until 2020. Ahead of that catalyst — which is arguably the biggest catalyst for this stock ever — investors will continue to bid up FB stock to much more aggressive valuation levels.
Market Cap: $280 Billion
YTD Gain: 49.2%
How It Got Here: Payments processing giant Mastercard (NYSE:MA) has surged 49% higher so far in 2019 thanks to a more favorable economic backdrop powering continued strong volume, revenue and profit growth. Specifically, as rates have gone down and U.S. consumer confidence has rebounded, consumer spending has picked up. As that has happened, Mastercard’s volume and revenue growth rates have likewise rebounded. At the same time, management has exercised disciplined cost control, margins have expanded and profit growth has remained robust. This has powered MA stock to new highs.
Where It’s Going Next: MA stock should head higher from here into the end of 2019. That’s mostly because the consumer economic backdrop (low rates, low unemployment, big wage gains, etc) lends itself to continued robust volume, revenue, and profit growth at Mastercard. But gains going forward should also be more muted, thanks to what has become a stretched valuation. It sits at 36.5 times forward earnings, versus a five-year average forward multiple of 26.3. Thus, while MA stock will stay in rally mode, future gains will be muted relative to historical gains.
Market Cap: $141 Billion
YTD Gain: 42%
How It Got Here: Alongside Mastercard, peer payments processor PayPal (NASDAQ:PYPL) has also risen more than 40% in 2019 on the back of favorable economic fundamentals and growth trends. Broadly speaking, low rates and a strong labor market have supported strong consumer spending over the past several quarters. A bunch of that spend is being directed into the online channel thanks to the secular shift towards e-commerce. Of that online consumer spending pie, a healthy portion is being processed through PayPal. The platform’s volume, account and revenue growth rates have consequently remained robust. Profit growth has similarly remained robust, and that sustained growth has pushed PYPL stock to new highs in 2019.
Where It’s Going Next: Much like MA stock, PYPL stock should head higher into the end of 2019, but at a more muted pace. Growth trends here should remain favorable thanks to the supportive consumer economic backdrop. But, valuation is also extended, at 40-times forward earnings, versus a five-year average forward multiple of 29. Thus, valuation and growth will be in a tug-of-war over the next several months, and that ultimately means that PYPL stock will grind higher at a tepid pace.
Market Cap: $164 Billion
YTD Gain: 47%
How It Got Here: Another large-cap winner in 2019 has been streaming giant Netflix (NASDAQ:NFLX). NFLX stock is up more than 40% year-to-date on the back of three things. One, the over-the-top (OTT) streaming growth narrative has remained vigorous in 2019. Consumers globally continue to pivot into the OTT channel. Two, Netflix has continued to develop quality original content with high perceived value. That strong original content portfolio has enabled Netflix to continue to win over the lion’s share of global OTT subs. And three, the economics continue to grow more favorable as more subscribers join the platform. NFLX stock margins are marching higher, powering doubly robust profit growth.
Where It’s Going Next: The three tailwinds which have driven big gains in NFLX stock year-to-date, should persist into the back half of the year. That should keep NFLX stock on a winning trajectory. The global OTT sub market will continue to grow. Netflix will maintain its market leadership position thanks to its original content portfolio. And margins will stay on an uptrend as scale drives positive operating leverage. Valuation will become more of an issue in the back half of the year, but the growth potential for NFLX stock is so big long-term that, with rates depressed, it should continue to run higher for the foreseeable future regardless of near-term valuation friction.
Lockheed Martin (LMT)
YTD Gain: 41%
How It Got Here: For shares of global aerospace and defense giant Lockheed Martin (NYSE:LMT), 2019 has been year of steady and consistent gains. LMT stock has benefited from cooling U.S.-China trade tensions, stabilizing global growth trends, continued robust government defense spending, a few sizable contract wins, strong quarterly numbers, a healthy full-year 2019 guide and a plunge in fixed-income yields. That last has made the 2.3% yield on LMT stock that much more attractive.
Where It’s Going Next: LMT stock should be able to head higher in the back half of 2019, mostly because all of those aforementioned tailwinds will remain in play. But the magnitude of the gains will be substantially lower than what the stock experienced in the first half. That’s mostly because the yield and forward earnings multiple are now back to historically normal levels, so further upside through multiple expansion is unlikely.
Market Cap: $108 Billion
YTD Gain: 41%
How It Got Here: Global coffee retail giant Starbucks (NASDAQ:SBUX) has rallied to all-time highs in 2019 for three big reasons. First, the China growth narrative has gained momentum as China’s economy has shown signs of stabilizing in 2019. Second, the U.S. growth narrative is rebounding thanks to improving traffic trends. Third, margins have remained relatively stable on improving top-line trends. Put together, those three factors have sparked a 41% year-to-date rally in SBUX stock.
Where It’s Going Next: It’s tough to see SBUX stock rallying much further from here. Growth trends still aren’t great. Traffic trends have been largely negative for several quarters, and remain negative today, implying that indie coffee shop competition is continuing to pressure Starbucks. Further, margins aren’t moving higher. They are just flat. Thus, you have a slowing-top-line-growth company with flattish margins. That’s not a great growth profile. But, at an above-average 29-times forward multiple, SBUX stock is priced for great growth. This discrepancy could ultimately short-circuit the big 2019 rally in SBUX stock.
Market Cap: $166 Billion
YTD Gain: 39%
How It Got Here: Although a flat yield curve and low rates typically aren’t good things for bank stocks, shares of major U.S. bank Citigroup (NYSE:C) have nonetheless rallied in a big way (up 39% year-to-date) due to a flurry of other tailwinds. Namely, consumer confidence and spending have both remained healthy in the U.S. Citigroup’s numbers have consequently remained healthy. C stock also passed the most recent stress test, and in response, hiked its dividend, which now seems especially attractive next to a depressed 10-Year Treasury yield.
Where It’s Going Next: It’s tough to see Citigroup stock rallying much further into the end of 2019. The valuation is at historically normal levels, while growth trends going forward should be below-normal given low interest rates and a flattish yield curve. A rate cut will help the yield curve situation, some, but not enough to give C stock more firepower. As such, it looks like the best of the Citi rally may be over.
Market Cap: $392 Billion
YTD Gain: 37%
How It Got Here: The third payments stock on this list is Visa (NYSE:V). Much like the other two payment stocks, Visa finds itself up big year-to-date because of favorable market conditions and growth trends. Low rates and continued strong consumer economic conditions have led to sustained strong consumer spending. At the same time, the pivot to non-cash transactions has gained momentum, so most of this consumer spending is happening through card transactions. The king of card transactions? Visa. As such, Visa’s numbers in the first half of 2019 have been really good from a volume growth and margin expansion perspective. Those really good numbers have propelled Visa stock higher.
Where It’s Going Next: At the risk of sounding like a broken record, Visa stock’s go-forward growth prospects are nearly identical to those of the other two payments stocks on this list. That is to say, the stock will stay on an uptrend into the end of the year because the underlying growth trends will remain favorable. But, the slope of that uptrend will flatten out because Visa stock is already priced for greatness — 29 times forward earnings, versus a five-year average forward multiple of 25).
Market Cap: $1.06 Trillion
YTD Gain: 38%
How It Got Here: Technology giant Microsoft (NASDAQ:MSFT) has surged 38% higher in 2019 — and shot to a market cap above $1 trillion — because the company’s core cloud businesses have bounced back in a big way. Ever since Satya Nadella took over the reins in 2014, Microsoft’s growth narrative has been all about developing and scaling cloud solutions. Those cloud solutions have been on a secular uptrend ever since. So has MSFT stock. But cloud growth rates dropped in late 2018 as macroeconomic uncertainty weighed on global cloud capex, and depressed Microsoft cloud demand. That uncertainty didn’t last very long. By early 2019, as trade tensions cooled and global economic trends stabilized, cloud capex accelerated higher. So did Microsoft’s cloud businesses. That growth re-acceleration has driven MSFT stock substantially higher year-to-date.
Where It’s Going Next: MSFT stock will stay on a healthy medium-to-long-term uptrend so long as the company’s cloud businesses continue to grow at robust rate. For the foreseeable future, this is exactly how things should play out. Robust cloud spend is supported by multiple tailwinds, ranging from the fact the data is only becoming more valuable and more abundant, to the fact that global economic conditions are improving. Low rates will also help support what has become a stretched valuation in MSFT stock. As such, Microsoft’s cloud businesses project to remain healthy in the back half of 2019. Thus, MSFT stock projects to keep moving higher.
YTD Gain: 38%
How It Got Here: Cloud giant Adobe (NASDAQ:ADBE) has soared 38% higher in 2019 as strong numbers have reaffirmed the company’s secular growth narrative, against the backdrop of a low rate environment which has supported a richer valuation for ADBE stock. On the first point, Adobe is a visual cloud giant positioned for huge growth as: 1) consumers and enterprises continue to adopt cloud solutions, and 2) consumer and enterprise interactions continue to become more centered around visuals than ever before. Adobe’s first half 2019 numbers were very good, and supported the notion that this secular growth narrative remains on track. On the second point, a plunge in the 10-year yield from 2.8% to 2% in 2019 has helped support substantial multiple expansion for ADBE stock from 28 times, to 40 times forward earnings.
Where It’s Going Next: ADBE stock should continue to move higher in the back half of 2019 so long as two things remain true. First, Adobe needs to keep reporting strong quarterly numbers which reaffirm the secular bull thesis. That should happen, given healthy economic conditions and strong tailwinds supporting visual cloud solution adoption. Second, rates need to remain low to support ADBE’s now bigger-than-normal valuation. This, too, should happen, since the Fed appears poised to cut rates, and such cuts should keep rates depressed for the foreseeable future.
As of this writing, Luke Lango was long FB, PYPL, NFLX, and ADBE.