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With the New Year upon us, many market observers have been bullish on market growth, with the so-called Trump rally propelling domestic equities to new highs. His plans to cut corporate taxes, reduce costly business regulations and spend heavily on rebuilding aging U.S. infrastructure are viewed as major positives for U.S. companies.
Fed’s gradual rate hikes, anticipation that OPEC oil production quotas will hold up, dual rebound in corporate profitability and GDP, and investors shrugging off black swan events like Britain’s vote to leave the EU are expected to help the benchmark S&P 500 index rise at a steady pace in 2017. Given such promising trends, we have outlined solid S&P 500 companies that will take the market by storm this year.
Market-Friendly Trump Wins Election
The stock market started off on weak note in 2016, with erratic share price movements that irked investors especially in January and February. After gaining some stability, the markets were quite a snoozer until the election. The stocks, however, ended the year strongly on expectations that there may be more business-friendly developments in Washington, with Trump’s policies propelling growth as well as inflation.
Possibilities of tax cut, increased spending on infrastructure and deregulations also boosted optimism. Trump plans to trim business tax rate to 15% from 35%, which is expected to boost profits of large companies. Trump, in the meantime, is expected to offer $137 billion in tax credits to private construction companies undertaking infrastructure projects, while has also called for repealing parts of the Dodd-Frank Act, which has for a considerable period of time limited operational flexibility on smaller banks. Lest we forget, Trump’s win coincided with the highest level of consumer confidence in 13 years in Dec 2016.
Financial, Energy Stocks Led the Rally
Much of the rally was led by financial stocks, rooted in hopes for government deregulation of the industry. There is also hope that higher interest rates will eventually boost bank’s interest income. The Fed had increased interest rate from a range of 0.25%–0.5% to 0.5%–0.75% in Dec 2016. This marked the first rate hike in 2016 and the second in the last ten years. The Fed, further, projects three rate increases this year. Fed Chair Janet Yellen has also said that the labor market has strengthened and wage growth is picking up, underscoring the fact that the central bank will continue to raise interest rates this year. Financial stocks form about a third of the S&P 500 and are up 17% since the election.
Energy stocks also contributed to the rally. Such stocks gained on hopes that successful implementation of OPEC and non-OPEC producers’ plan to trim crude oil production will curtail oversupply in the market and drive oil prices.
Growth Hinges on Positive Corporate Earnings
The fog over earnings recession in the S&P 500 seems to have cleared. And why not? The energy sector that bore the brunt of weak earnings in recent times is gathering momentum. In fact, earnings recession ended in Q3 when growth finally turned positive after five back-to-back quarters of decline. The growth pace is further expected to continue in Q4 and ramp up in the following quarters.
For Q4 as a whole, total earnings for the S&P 500 companies are expected to be up 3.4% from the same period last year on 4.1% higher revenues (read more: Will the New Year Bring Earnings Growth?).
Top 5 S&P 500 Stocks for Your Portfolio
Thanks to the Trump rally, Fed’s rate hike and expectations of a rise in fourth-quarter earnings, there are hopes that the bullish trend will continue. Rebound in GDP also seems to have abated fears of an imminent recession. The U.S. economy after growing at a 0.8% rate in the first quarter of 2016 and 1.4% in the April-thru-June quarter, advanced 3.5% in the third quarter.
If the January effect happens, this could turn into a multi-month rally. It is the seasonal increase in stock prices during the month of January which mostly happens when investors use year-end cash bonuses to purchase investments in the following month.
Eminent strategists expect the rally to continue. While David Kostin of The Goldman Sachs Group, Inc. GS said that “the prospect of lower corporate taxes, repatriation of overseas cash, reduced regulations, and fiscal stimulus has already led investors to expect positive EPS revisions”, Adam Parker of Morgan Stanley MS added that “higher odds of looser U.S. fiscal policy raise the likelihood of better growth”.
Citigroup Inc. C provides various financial products and services for consumers, corporations, governments, and institutions worldwide. The company has a Zacks Rank #2 and a VGM Score of ‘B’. The Zacks Consensus Estimate for its current year earnings increased 1.1% over the last 60 days.
Citigroup has given a return of 14.8% last year, more than the S&P 500’s return of 9.5%. The company’s expected growth rate for the current year is 10.6%, higher than the S&P 500’s 8.7%.
Broadcom Limited AVGO develops and supplies a range of complex digital and mixed signal complementary metal oxide semiconductor. The company has a Zacks Rank #1 and a VGM Score of ‘B’. The Zacks Consensus Estimate for its current year earnings increased 6.1% over the last 60 days.
Broadcom has returned 28.4% last year, while the company’s expected growth rate for the current year is 11.1%.
Deere & Company DE manufactures and distributes agriculture and turf, and construction and forestry equipment worldwide. The company has a Zacks Rank #1 and a VGM Score of ‘B’. The Zacks Consensus Estimate for its current year earnings increased 15.1% over the last 60 days.
Deere has given a return of 35.1% last year, while the company’s expected growth rate for the current year is 21.9%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Harris Corporation HRS provides technology-based solutions that solve mission-critical challenges for government and commercial customers. The company has a Zacks Rank #2 and a VGM Score of ‘B’. The Zacks Consensus Estimate for its current year earnings increased 0.9% over the last 60 days.
Harris has given a return of 17.9% last year, while the company’s expected growth rate for the current year is 10.8%.
UnitedHealth Group Incorporated UNH operates as a diversified health and well-being company in the U.S. The company has a Zacks Rank #2 and a VGM Score of ‘A’. The Zacks Consensus Estimate for its current year earnings increased 1.1% over the last 90 days.
UnitedHealth Group has given a return of 36.1% last year, while the company’s expected growth rate for the current year is 18.4%.