Last week we ended the first half of 2019 with strong performance put in by all the major domestic stock indices. Results in the March quarter drove the majority of the performance as slowing global economic data weighed on investors during the June quarter, which was buoyed by dovish comments from the Federal Reserve and to a lesser extent the European Central Bank. Those comments, aided by news over the weekend that Presidents Trump and Xi have agreed to resume trade talks after a two-month hiatus, helped the market move higher despite revisions to earnings expectations that now call for year-over-year declines in each of the first three quarters of 2019.
We are now in the early stage of the second half of 2019, and the question we now face is "Where should investors look to invest their capital?" To properly answer that question, we first must take stock of the latest piece of economic data, the June PMI data from IHS Markit.
Across the four key economic horseman of the global economy, which are the U.S., China, Japan and the eurozone, the June data fell compared to May, confirming the global economic slowdown. Even though the U.S. and China have agreed to resume trade talks with no new tariffs put in place, the existing ones remain at least for now and they will have an impact on revenue and earnings.
In looking at the most recent set of earnings expectations for the S&P 500, which is the benchmark for most investors, 2019 earnings are now expected to rise 3.9%, with the second half of the year growing roughly 10% compared to the first half. One factor driving that expected increase is seasonality, with examples including back-to-school and holiday shopping, which historically have resulted in the second half of the year generating 52% of full-year S&P 500 earnings.
Two companies in particular that are well-positioned to capitalize on that second-half seasonality are Amazon.com Inc. (AMZN) and one of my favorite companies, McCormick & Co. (MKC) .
For Amazon, we not only have the increasing shift to digital commerce that will continue to gain ground against brick-and-mortar shopping, we also have its expansion into private-label products spanning from apparel to furniture. Helping goose its business, Amazon strategically has opted to collapse two-day shipping to one day for Prime members, and odds are this is something it will exploit during the coming 2019 Prime Day deal bonanza. Two other upside drivers that could emerge for Amazon shares in the back half of the year are the awarding of a $10 billion government cloud contract and Amazon's entrance into the prescription drug market with its PillPack acquisition.
With McCormick, the company continues to squeeze out integration synergies with recently acquired businesses while its spices business caters to consumers who are looking for healthier eating options.
As I've said before, the very back half of the year is a very good time for MKC shares given two factors. The first I refer to as "season's eatings," owing to the Thanksgiving-to-New Year's holidays that spur demand for its spices, extracts and other core products.
The second factor is that this is the time of year when McCormick traditionally shares its dividend increase plans, and it has been doing this for the past 33 years. I've touched on this when talking about the Dividend Kings or Dividend Aristocrats, of which MKC shares are a member, but it bears repeating - all things being equal, the continued increase in dividend payments tends to result in a step function higher for the company's share price. With McCormick's current quarterly dividend equating to roughly 45% of trailing earnings, there is ample room for further dividend increases.
One other company that is poised to perform solidly in the coming six months is AT&T Inc. (T) . The core mobile business is both sticky with consumers and inelastic, which could allow for price increases, particularly as it rolls out its 5G network and it funds the company's dividend. For those keeping watch, the current dividend yield on AT&T shares is more than 6%, which itself makes the shares desirable in a slowing global economy even if U.S.-China trade anxiety has fallen to the wayside for the moment.
The real catalyst for AT&T shares in the second half is the debut of its streaming video service, WarnerMedia, which leverages all its Time Warner assets combined with its DirecTVNow business. Effectively, it is streaming live TV married with a Netflix-like NFLX library that can be monetized over existing subscribers.
In many respects that service could give AT&T one leg up on Walt Disney Co. DIS, which is new to the subscriber-based businesses, and we saw how details surrounding Disney+ popped DIS shares. Odds are we could see a similar move with T shares once the company formally announces WarnerMedia later this year.
