This story was originally published here.
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:
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.
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