With Wall Street in the midst of its biggest rally ever, it may be time to identify the large-cap stocks leading this rally, and buy those top stocks. Why? Because both history and fundamentals say that this rally isn’t over — and that large-cap stocks have a lot more room to run.
From its March lows, the S&P 500 has climbed more than 46%, marking its largest extended rally, ever, dating back to 1957 (which is when the index moved to include 500 stocks). If you look at previous rallies wherein the index rallied more than 20% over a 50-day stretch (which includes seven other instances), the S&P 500 was higher both six and twelve months later, every time. More than that, the average six month gain following these huge rallies is 10%. The average twelve month gain? Almost 20%.
In this case, history lines up with the fundamentals. InvestorPlace spoke with Andrew Karolyi, Deputy Dean and Dean of Academic Affairs at Cornell’s SC Johnson College of Business, about spurring the economy in the wake of Covid-19:
“In the immediate aftermath of the financial crisis of 2007-2008, the leadership of the Federal Reserve, ECB, and other central banks understood the need for aggressively accommodative and well-coordinated actions to ensure the functioning of financial markets. This likely averted what could have been a much more severe recession. The slow pace of economic growth coming out of that last recession likely stemmed from the fact that the fiscal stimulus actions in response in the U.S. and in other major economies were too muted. What we have seen during this Covid crisis is not only timely aggressive, coordinated actions by central banks as before but also aggressive, coordinated actions by fiscal authorities. As painful as the economic contraction and huge unemployment spikes have been, these efforts will likely hasten a faster economic rebound and prevent a depression.”
Now that Covid-19 hysteria is dying down and the global economy is reopening, we’re in the early stages of an economic rebound, and Wall Street’s biggest rally ever. Ample fiscal and monetary stimulus, coupled with pent-up consumer demand, will drive a significant rebound in consumer spending. About 70% of the U.S. economy is driven by consumer spending. So a rebound in the consumer will power a rebound in overall economic activity, which will lead to job creation and more spending. Lather, rinse, repeat. It’s a virtuous economic cycle that should power stocks higher over the next six to twelve months.
With that in mind, let’s take a closer look at the large-cap stocks leading this record rally, and analyze them more closely to see if they’re worth buying as this record rally lives on:
- Facebook (NASDAQ:FB)
- Disney (NYSE:DIS)
- Apple (NASDAQ:AAPL)
- Nike (NYSE:NKE)
- Amazon (NASDAQ:AMZN)
- Microsoft (NASDAQ:MSFT)
- Visa (NYSE:V)
- Netflix (NASDAQ:NFLX)
- Boeing (NYSE:BA)
- Home Depot (NYSE:HD)
- Nvidia (NASDAQ:NVDA)
- Intel (NASDAQ:INTC)
- Tesla (NASDAQ:TSLA)
- McDonald’s (NYSE:MCD)
- Alphabet (NASDAQ:GOOG)
Large-Cap Stocks Leading the Rally: Facebook (FB)
Percentage Gain from March Lows: +68%
At first, Facebook stock plunged in March on concerns that Covid-19 would kill consumer discretionary spending, which would lead to lower ad spending and therefore lower revenues and profits for the digital advertising giant.
Facebook stock has since rebounded a resounding 68%, as Covid-19 hysteria has moderated and the economy has reopened. This paves the path for consumer discretionary and ad spending to rebound in the coming months, and Facebook to get back to business-as-usual soon.
Going forward, FB stock will remain strong. Not only will consumer and ad spending keep rebounding, but Facebook appears well-positioned to finally make meaningful gains in the e-commerce market with its new Shops initiative. Behind sustained big ad growth and new e-commerce expansion, still reasonably priced FB stock will keep powering higher.
Percentage Gain from March Lows: +58%
Disney stock fell off a cliff in March because essentially all its operating businesses got hit hard by Covid-19. Disney’s theme parks were closed. Movie theaters were closed. Consumers stopped buying toys and games. TV ad spending slowed.
But, once signs emerged that the Covid-19 pandemic wasn’t going to shut the economy down for that long, Disney stock started rebounding on the idea that movie theaters, theme parks and shopping centers would re-open. DIS stock is up an impressive near 60% from its March lows.
I suspect this big rebound will persist. The fundamentals here will only get better over the next few months. Disney’s revenue and profit trends will improve, and DIS stock — which is still fairly cheap at a below-average sales multiple — will keep rebounding. Also, sustained strength from Disney+ and the whole streaming business should help.
Large-Cap Stocks: Apple (AAPL)
Percentage Gain from March Lows: +44%
As the physical economy shut down in February and March, Apple stock collapsed as the company’s supply-demand fundamentals materially deteriorated. On the supply side, many of Apple’s factories throughout Asia were shut down, hampering production capability. On the demand side, Apple stores throughout the world closed, and consumer discretionary spending — particularly big-ticket spending on things like $1,000 phones — fell off a cliff.
Those supply-demand fundamentals have significantly improved since March, with many of Apple’s factories and stores reopening, and consumer demand rebounding. As the fundamentals have improved, so has AAPL stock, which is up more than 40% from its March lows.
Apple stock will stay strong into the end of 2020, mostly because rebounding consumer spending trends and pent-up demand will converge on a huge 5G iPhone launch in the last few months of the year to spark a massive holiday quarter for this company. Ahead of that huge holiday quarter, traders will likely continue to bid up AAPL stock.
Percentage Gain from March Lows: +72%
Consumers stopped buying clothes amid the coronavirus pandemic, so it should be no surprise that leading athletic apparel maker, Nike, saw its stock get killed in March.
But NKE stock has rebounded more than 70% since then, because consumers have started to buy clothes again. Specifically, apparel shopping trends bottomed in early April, and have since rebounded significantly as state and local governments have eased social distancing orders and as retail stores have reopened.
At current levels, NKE stock is richly valued. This rich valuation may prevent the stock from heading much higher over the next few months. But, resurgent consumer spending will also prevent it from crashing. As such, I see NKE stock as being range-bound for the foreseeable future, as the fundamentals play catch-up with the valuation.
Large-Cap Stocks: Amazon (AMZN)
Percentage Gain from March Lows: +55%
Amazon stock was the perfect stock to buy during the coronavirus pandemic. At first, shares dropped mildly because investors were afraid that Covid-19 was simply going to kill the economy.
Then, though, investors gobbled up AMZN stock in bunches as they realized that Covid-19 wasn’t going to kill the economy, but rather just change the economy… and change it for the better of Amazon. Consumers shifted towards online shopping (where Amazon.com is king). They also switched to video gaming (where Amazon’s Twitch is the leading streaming platform) and online groceries (where Amazon is a big player). At the same time, enterprises switched to cloud-hosted virtual services (and Amazon Web Services is the biggest infrastructure player in that space).
To be sure, some of those tailwinds will moderate as Covid-19 hysteria calms down. However, Amazon’s growth trajectory will remain robust, because increased consumer and enterprise spending will more than offset any headwinds from decreased Covid-19 hysteria. As such, I see AMZN stock extending its big rally into the end of the year.
Percentage Gain from March Lows: +42%
Much like Amazon stock, Microsoft stock initially plunged in March on concerns that the coronavirus pandemic would entirely kill the global economy.
Then, MSFT stock rebounded as it became obvious that the economy wasn’t going to die, but rather pivot towards more cloud-hosted virtualized services. That’s a positive pivot for Microsoft. The company has market-leading cloud infrastructure, productivity and communications solutions.
As such, the 40%+ rally in MSFT stock since March should be no surprise. Nor should sustained strength in this stock, because the enterprise pivot towards the cloud will live on long after Covid-19 dies. So long as the cloud megatrend remains robust, Microsoft’s revenues and profits will grind higher. So will MSFT stock.
Large-Cap Stocks: Visa (V)
Percentage Gain from March Lows: +49%
Payments giant Visa saw its stock fall off a cliff in March on fears that Covid-19 would entirely consumer spending and, therefore, entirely kill Visa’s revenues and profits.
But, Covid-19 didn’t do that. Consumer spending did drop significantly in March and April. But a rebound is already under way, with discretionary spending consistently climbing in-step with broader re-opening efforts across the U.S. This rebound in consumer spending has coincided with a big ~50% rebound in Visa stock.
Much like Nike stock, Visa stock will likely be range-bound going forward. Upside will be limited by valuation risks. Downside will be limited by resurgent consumer spending. So, I say fade any further big rallies in Visa stock, and buy any future big dips.
Percentage Gain from March Lows: +25%
For a brief moment, Netflix stock did drop as the coronavirus pandemic emerged across the globe in late February and early March.
Then, the stock rebounded with vigor, because investors saw the writing on the wall: if the physical economy is shut down, and consumers are under widespread stay-at-home orders, then they will swarm to streaming services like Netflix. Indeed, that’s exactly what happened. Netflix reported record new subscriber additions in the first quarter of 2020. NFLX stock popped.
Going forward, I think NFLX stock will struggle, before it gets back to rallying over the long haul. The stay-at-home tailwind is dying down at the same time that the stock is trading at one of its richest valuations in recent memory. That combination implies near-term pain. But, Netflix is the leader in a secular growth category with a huge moat in the form of robust original content and streaming technology. As such, long-term, this stock will head way higher — but things will get choppy first.
Large-Cap Stocks: Boeing (BA)
Percentage Gain from March Lows: +158%
The airline industry was hit especially hard by the coronavirus pandemic. From early March to mid-April, U.S. air passenger traffic dropped 96%. Airline operators cut back spending in response to this demand plunge. And Boeing — who sells airplanes to those airline operators — saw its stock get crushed.
Then, air passenger traffic rebounded. From mid-April to early June, U.S. air passenger traffic has rebounded more than 400%, as state and local restrictions on travel have eased and economies have reopened. Amid this rebound in air traffic, all-things-airline-related have rebounded, including Boeing stock, which is up more than 150% from its March lows.
I’m not convinced that this rally has much more room to run. BA stock is very richly valued at currently levels. Air traffic is still down more than 80% year-over-year. The rebound will take time. There will be hiccups. Combining all those realities, it simply seems like BA stock — on the heels of a 150%+ rally — is out over its skis at the current moment.
Home Depot (HD)
Percentage Gain from March Lows: +81%
Home improvement retailer Home Depot saw its stock price initially plunge in February and March on fears that Covid-19 would entirely kill the housing market, and therefore, entirely kill a large portion of Home Depot’s business.
But, while the housing market has been hit hard by Covid-19, it appears that the damage was short-lived. That is, the real estate market is already bouncing back. As investors changed their outlook on the housing market from “long-term damage” to “near-term pain”, HD stock rallied. By more than 80%.
Although the housing market and discretionary spending on home improvement projects will improve over the next few months, it’s fair to say that HD stock — trading above where it was pre-Covid-19, and at its richest valuation in a decade — is already priced for these improvements. As such, I’d be wary of chasing the red-hot rally in HD stock.
Large-Cap Stocks: Nvidia (NVDA)
Percentage Gain from March Lows: +75%
The semiconductor market was hugely and negatively impacted by the coronavirus pandemic, as supply chains across the globe were disrupted and end-market demand plunged. Nvidia stock was no exception to this trend. Shares fell from over $300 in late February, to under $200 by mid-March.
Then NVDA stock bottomed, and rallied 75% off those lows, as the supply-demand fundamentals across the entire semiconductor industry materially improved. Demand trends rebounded as consumer and enterprise spending rebounded. Supply chains were restored as factories reopened. Everything got better.
Everything will keep getting better. The enterprise cloud transformation has accelerated. A new wave of 5G smartphones is coming soon. Edge computing. Self-driving. IoT. All of these secular demand drivers imply that Nvidia’s growth narrative will remain strong for the foreseeable future — and imply that NVDA stock will stay on a winning path.
Percentage Gain from March Lows: +47%
Much like Nvidia stock, Intel stock plunged in February and March because investors were afraid that the Covid-19 pandemic would inflict lasting damage on the underlying supply-demand fundamentals in the semiconductor industry.
But that didn’t happen. Instead, global semiconductor sales are already starting to stabilize, and project to improve going forward thanks to surging cloud and 5G end-market demand. As this more favorable reality emerged, INTC stock rebounded. By almost 50% from its March lows.
I suspect this rebound will persist. There are huge end-market catalysts on the horizon (including rising 5G demand), and the stock is still pretty cheap (just 14-times forward earnings). This attractive combination of big growth potential and a cheap valuation will keep INTC stock in rally mode.
Large-Cap Stocks: Tesla (TSLA)
Percentage Gain from March Lows: +166%
U.S. automobile demand plunged by nearly 50% through March and April amid widespread physical store closures and huge drops in discretionary spending. Not even Wall Street’s favorite automobile company — Tesla — could survive this apocalyptic backdrop. TSLA stock plunged from $900 to $350 in March.
Then the stock rebounded all the way back to $900 by June, because: 1) automobile sales rebounded sharply in April, and 2) Tesla’s new cars continue to dominate the EV industry across every model vertical and geography.
This big rally in TSLA stock may stall out over the next few months because of valuation friction. But long-term investors shouldn’t fret this near-term choppiness. Once the fundamentals catch-up here (and they will), the stock will resume its long-term uptrend, because in the big picture, this company is leading a once-in-a-lifetime disruption of the huge automobile industry.
Percentage Gain from March Lows: +60%
In March, restaurants everywhere shut down, and consumers were ordered by their state and local governments to stay at home. Against that backdrop, McDonald’s sales plunged. So did MCD stock.
Then the stock rebounded with vigor throughout April, May and June because restaurants started to re-open, stay-at-home orders started to expire and consumer spending recovered. From its March lows, MCD stock is up 60%.
At current levels, MCD stock trades largely in-line with its historically normal valuation. Concurrently, the fast food giant’s growth trends should continue to recover towards peak levels as the economy and consumer behavior normalize over the next few months. This combination of improving growth trends and a historically normal valuation should produce reasonably good returns in MCD stock.
Large-Cap Stocks: Alphabet (GOOG)
Percentage Gain from March Lows: +41%
Last, but not least, on this list of large-cap stocks leading Wall Street’s biggest rally ever is Alphabet, the technology giant who saw its stock plunge in February and March on concerns that the pandemic would kill both ad spending and enterprise IT spending, thereby weighing on Alphabet’s core ad and cloud businesses.
But ad spending trends are already rebounding. And demand for cloud infrastructure has actually accelerated amid the pandemic, because companies have been forced to digitize amid physical office closures. As such, GOOG stock has rebounded more than 40% from its March lows.
Going forward, ad spending trends will continue to rebound on the back of resurgent consumer spending. Cloud infrastructure demand will remain robust, mostly because the enterprise cloud transformation has permanently accelerated. And Alphabet’s growth trends will meaningfully improve, which will power continued gains in GOOG stock.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long FB, AMZN, MSFT and NFLX.