Fed May Stick to 25 bps Rate Hike After SVB Fiasco: 5 Picks

AMP HSIC MCHP HSBC

Wall Street tumbled last week following the collapse of Silicon Valley Bank — the biggest bank failure since the days of the great recession of 2008. Market participants remained highly concerned that the ripple effect of the bank’s failure may shake the broad market. However, a sliver lining in the SVB disaster is that the Fed may be compelled to stick to a 25 basis points hike in interest rate in its March FOMC meeting.

A Hawkish Fed

The Fed hiked the benchmark interest by a staggering 4.25% in 2022 to combat 40-year high inflation. The inflation rate reached its peak at 9.1% in June 2022 and thereafter declined to 6 — 6.5% in December, though it stayed significantly higher than the central bank’s 2% target rate.

A steady decline in the inflation rate in the last three months of 2022 enabled the Fed to reduce the magnitude of rate hike to 25 basis points. However, a sudden spike in inflation in January and a series of strong economic data changed the whole scenario.

On Mar 7 and 8, in his testimony to the U.S. Congress, Fed Chairman Jerome Powell warned that interest rates are likely to head higher than what central bank policymakers had anticipated. In the December FOMC meeting, Fed officials had estimated the terminal interest rate to be at 5.1% for this rate hike cycle.

However, after Powell’s testimony, the CME FedWatch showed that market participants expect the terminal interest rate to be within 5.5% to 5.75% range. Moreover, the CME FedWatch showed a 73.5% probability that the Fed would hike the benchmark interest rate by 50 basis points in the March FOMC meeting while the probability of a 25 basis-points hike is just 26.5%. These situations were almost reversed just before the release of Powell’s testimony.

Government Assures SVB Depositors About Their Money

Market participants’ expectations regarding rate hike have changed significantly after last week’s SVB debacle. The bank is the first major casualty of the Fed’s aggressive rate hike. A large section of economists and financial experts have warned that the Federal Government should immediately find a buyer for SVB or else the ripple effect of the bank’s failure will shake the broad market.

Investors are highly concerned that the collapse of SVB will significantly dent the confidence of U.S. small and mid-sized banks. Clients of SVB’s startup companies, especially from the technology sector, will find it hard to run their business. Venture capitalists and private equities will be under pressure to raise more capital. This has forced the U.S. government to assure all SVB depositors about their money.

Moreover, the Department of Labor reported that nonfarm payrolls came in at 311,000 in February, beating the consensus estimate of 227,000. However, the number declined significantly from January’s data of 504,000.

The unemployment rate increased to 3.6% in February from 3.4% in January. Average hourly earnings increased 0.2% in February compared with a 0.3% rise in January. Year over year, hourly wage rate rose 4.6% in February, below the consensus estimate of 4.8%.

Consequently, the CME FedWatch is now showing an overwhelming 70.9% probability that the Fed will raise the benchmark lending rate by 25 basis points in the March FOMC meeting. Importantly, 29.1% respondents expect the central bank to keep the interest rate static at the current range of 4.5 to 4.75%. No respondent expects a more than 25 basis point rate hike.

Our Top Picks

At this stage, we have applied our VGM Style Score to narrow the search to select five companies that have strong earnings growth potential for 2023. These stocks have seen positive earnings estimate revisions in the last 60 days. Finally, each of our picks carries a Zacks Rank #1 (Strong Buy) and a VGM Score of A or B.  You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks year to date.

Ameriprise Financial Inc. (AMP - Free Report) provides various financial products and services to individual and institutional clients in the United States and internationally. AMP operates through four segments: Advice & Wealth Management, Asset Management, Retirement & Protection Solutions, and Corporate & Other.

Ameriprise Financial remains well-positioned for impressive top-line growth on the back of its robust assets under management balance and business restructuring initiatives. AMP constantly modifies its product and service-offering capacity to keep pace with dynamic market needs.

Ameriprise Financial has an expected revenue and earnings growth rate of 7% and 22.1%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5% over the last 60 days.

Everest Re Group Ltd.’s global presence, product diversification and capital adequacy bode well. Higher premiums earned by the Insurance segment will likely improve the expense and loss ratio. The Reinsurance segment of RE remains well-poised for leveraging opportunities, stemming from the continued disruption and evolution of the reinsurance market.

A strong capital position, with sufficient cash generation capabilities supports effective capital deployment. Everest RE is lowering exposure to areas not meeting the right risk-return profile, building a portfolio with a mix of product lines, better rate adequacy and higher long-term margins and repositioning its portfolio by moving up fixed-income credit quality.

Everest RE has an expected revenue and earnings growth rate of 12.8% and 70%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 4.2% over the last 30 days.

Microchip Technology Inc. (MCHP - Free Report) is riding on consistent strength in its analog and microcontroller businesses. MCHP’s dominance in 8,16 and 32-bit microcontrollers is driving top-line growth.

Strategic acquisitions like Microsemi and Atmel have expanded the product portfolio. MCHP is gaining from a recovery in demand across industrial, automotive and consumer end-markets, on the reopening of economies, globally. Collaboration with the likes of AWS is another positive.

Microchip Technology has expected revenue and earnings growth rates of 2.5% and 2.5%, respectively, for next year (ending March 2024). The Zacks Consensus Estimate for next-year earnings has improved 11.8% over the last 60 days.

Henry Schein Inc. (HSIC - Free Report) is a leading distributor of health care products and services across the globe. HSIC’s growth in the Technology and Value-added Services business was the strongest in international business buoyed by the strength of the Dentally cloud-based solution. Growth in North America was driven by sales of practice management software.

Moreover, sales growth in the Medical business continued to be robust, reflecting higher patient traffic to alternate care sites of Henry Schein. Widespread network and channel mix and favorable long-term trends in the dental business of HSIC look encouraging. A strong solvency position is a plus.

Henry Schein has expected revenue and earnings growth rates of 1.6% and 10.4%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 6.6% over the last 30 days.

HSBC Holdings plc (HSBC - Free Report) benefits from a strong capital position, rising interest rates, an extensive network and business restructuring initiatives. HSBC’s plan to exit from the U.S., French and Canadian retail banking business is expected to help it focus more on Asia. In sync with this, acquisitions of AXA Singapore insurance assets and L&T Investment Management Limited will expand its presence in the region.

HSBC has expected revenue and earnings growth rates of 12.1% and 59.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 22.5% over the last seven days.

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