The following is an excerpt from the October Market Strategy. To see the full PDF, click here.
S&P 500 Target
Looking beyond the capers in Washington, we maintain a longer-term bullish stance.
Zacks editors collectively forecast a 2013 target of 1770 for the year-end S&P 500. That would be a forward earnings yield of 6.5%. If we get towards the end of 2013 with U.S. GDP in healthy shape and no U.S. recession on the horizon, a nice stretch well above 1700 can feed on itself. Our collective low is just under 1600.
Q3 Earnings Season
The quarterly earnings season is close. Low expectations dropped the bar for surprises.
October forecasters see Q3 earnings up +1.4%. In early August, forecasters anticipated +3.3% total earnings growth. At 498 companies, S&P 500 earnings in Q2 were up +2.5% on +1.9% growth in revenues. S&P 500 earnings in Q1 were up +2.5% on barely positive growth in revenues. For Q4, projected total earnings stand at +11.7% overall, and at +8.4% without the Finance sector. High Q4 estimates should come down.
Q4 GDP Growth
The San Fran Fed says, “With the fiscal drag waning, we expect growth to pick up in the fourth quarter and next year.“
Zacks Sector/Industry/Company Telescope
(1) Within Health Care, the Medical Care industry remains attractive -- an upgrade on Affordable Care Act individual coverage. Drugs and Medical Products were upgraded to market weight or just above too.
Take a Look At: Wellcare Health (WCG - Snapshot Report), a Zacks Rank #2 stock. It provides high-quality, affordable healthcare services to members in Florida, New York, Connecticut, Illinois and Indiana.
(2) Consumers shrug off worry. Focus on very attractive cyclicals like Leisure, Autos, Tires, Trucks and the Home Furnishing-Appliance industries within Discretionary spending. Buying a new car, car parts, and furnishing a home remain attractive. Other Consumer Discretionary and Apparel industries became attractive in October. The consumer is holding us up.
No Consumer Staples industry has a strong Zacks Ranks now.
Take a Look At: Lear Corporation (LEA - Snapshot Report), a Zacks Rank #1 stock. It is a leading global supplier of automotive seating systems, electrical distribution systems and electronics.
(3) The IT sector saw a big upgrade. This globally exposed sector is on the way up. That’s big news from September to October. Ongoing strength is seen Semiconductors and Misc Tech. (i.e. Outsourcing & Data Processing). This speaks to growing use of small niche devices and components and corporate upgrading. Electronics Hardware and Computer Software PC companies showed up better in early October too.
Take a Look At: Micron Tech (MU - Analyst Report), a Zack Rank #1 stock. It is one of the leading worldwide providers of semiconductor memory solutions.
(4) Industrials got stronger. Aerospace & Defense, Business Products, and Business Services industries are the highest ranked. Conglomerates and Rails and Trucking are just beneath them. Six industries were below market. Industrial industries exposed to global growth conditions are above market.
(5) Telcos look better. They were upgraded to Market Weight.
(6) Finance has one very strong industry: Insurance. Investment Banking & Brokering got a strong rank too. Major Banks and Real Estate are at market. Weakness across Finance speaks to why the taper did not happen in September. Rising rates hurt home mortgage and real estate finance.
(7) In Energy, $4 a gallon gas and costly electric bills make alternatives more attractive. Alternate Energy industries turned up on top. Oil-Integrated and Oil E&P are at market. Focus on domestic production in the Bakken and Marcellus shale. Oil Drilling and Pipelines went below market. Coal is at the very bottom.
(8) One Materials industry is just above a Market Perform: Building Products. Global growth worries put a bottom on this sector. Not a turn up.
(9) Utilities overall are a poor choice overall.
To see John Blank's full October Market Strategy report, click here.