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Stocks Won't Test the Correction Lows

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This is a bold prediction. But I make it with about 70% certainty (thus a less than 1-in-3 chance we do touch the correction lows). And it's based on a sober analysis of the fundamentals.

First, let's look at the economy. Wednesday's second read on Q4 GDP was revised down a tenth 2.5%. But the largest positive contribution to the real GDP growth rate in Q4 was once again personal consumption. From Bloomberg...

Consumer spending is unchanged at a very strong 3.8 percent as downward revisions to spending on durables (down 4 tenths to a 13.8 percent rate) and nondurables (down 9 tenths to 4.3 percent) are offset by an upward revision to the largest category of service spending (up 3 tenths at 2.1 percent).

Tuesday's Consumer Confidence index jumping to 130, the highest level since November 2000, certainly bolster the case for a healthy economic base.

And these comments from Brian Wesbury, Chief Economist at First Trust, highlight the momentum we can expect this year...

The bottom line is that today's report should not change anyone's impression about the economy. We expect real GDP to grow at a 3%+ rate in 2018, which would be the first year that's happened since 2005. In particular, the tax cuts enacted in late December and the deregulation coming from Washington, DC are going to help spur faster growth. Meanwhile, today's report reminds us that the Federal Reserve is behind the curve.

That last sentence from Wesbury is a fact that still seems to have large investors worried, especially after new Fed chair Jerome Powell revealed his hawkish talons on Tuesday.

And it's what could send a wave of "rate fears" back into stocks, compelling some analysts to bet we'll re-test the lows.

But market players are over-estimating Powell's hawkishness when he was really just enthusiastic about the economy. And they are underestimating the twin forces of fundamental strength: the economy and earnings.

Here's what I wrote for members of my TAZR Trader service on Tuesday evening that includes the second component of fundamentals, earnings growth, arguing for new stock market highs in the first half of the year...

The S&P Will Not Go Below 2400 or 2500 or...

As the new Fed chair stretched his hawkish wings, market players took some profits out of the terrific post-correction rally we've had.
 
Not surprising and actually welcome if the rally is to persist.
 
Now we get to listen to market technicians who will come out of the woodwork and say "We've got a lower high in the indexes and it's all down hill from here!"
 
Ah, they wish it was that simple.
 
Am I absolutely certain that S&P 2700 will find strong buyers again?
 
No more than I could guarantee 2740-60 would hold.
 
But I lean 2-to-1 in favor of 2700 holding right now.
 
And should a worse "rate scare" take over market sentiment, I still don't think we'll see the correction lows touched, much less breached.
 
But let's go worst-case scenario for a moment... what if fear picks up again?
 
I go on record right now with this claim: The S&P will not go below 2400 in the first half.
 
Why? Because large investors who use quantitative models are starting to discount $160 in EPS in the next year and at 2400 that's a 15X market multiple.
 
They will be buyers before then. And it doesn't hurt that 2394 is the 61.8% retracement of the move from the 2016 breakout above 2100 to 2873.
 
In reality though, most fund managers will be buyers around 16X, or S&P 2560.

(end of TAZR 2/27 commentary)

For me and my followers, this fundamental and technical outlook means continuing to hold and accumulate fundamentally strong Zacks #1 Rank stocks like MasTec (MTZ - Free Report) , Lam Research (LRCX - Free Report) , and NVIDIA (NVDA - Free Report) .

And it also means holding on to Tech/Value winners like Apple (AAPL - Free Report) as it makes new all-time highs today above $180, and sticking with "expensive" growth disruptors like Square (SQ - Free Report) after another solid quarter reinforces their momentum in a new type of FinTech ecosystem.

Over a dozen investment bank analysts raised their price target on Square shares today as they look favorably on the company's continued 30%+ revenue growth, investment in new services like lending, and an "omnichannel" subscription model focused on international growth and "enabling sellers to engage with buyers wherever they are."

Square's subscription and services based revenues of $79 million in Q4 were up 96% year-over-year, accelerating from 84% growth in Q3, and ahead of the Street consensus of $71 million, with primary revenue contributors being instant deposit, Caviar, and Capital.

Last month, Nomura took the most optimistic outlook when they compared Square's financial disruption to Amazon a decade ago and raised their price target on shares to $64.

Today, Mizuho analysts coined a new "sexy sports car" comparison by calling Square an "Innovation Machine" and the "Tesla of Payments." They hiked their price target (PT) to $50 and these were other notable PT boosts...

PT Raised to $50 at Wedbush
PT Raised to $55 at Needham & Company, noting strong growth and margin expansion
PT Raised to $53 at Susquehanna
PT Raised to $48 at Goldman Sachs, noting 'Revenue Growth & Investments Continues to Accelerate'
PT Raised to $50 at Guggenheim
PT Raised to $51 at Cantor Fitzgerald
PT Raised to $51 at Barclays

Meanwhile, Jefferies analysts maintained their $53 PT and Buy rating as they like the fact that subscription-based services continued to perform well.

Again, Square isn't cheap trading at 100 times EPS and 10 times sales ($14.5 billion market cap / $1.33 billion projected 2018 revenues). But that's why you buy the dips under $40 when you get them and make sure you are investing in the long-term growth story, whether you liken it to Amazon or Tesla.

I consider Square either an expensive disruptor with a big first-mover growth advantage, or an M&A target for the likes of FinTech giants Visa and PayPal. Either way, it's one to own and accumulate.

Disclosure: I own shares of AAPL, SQ, LRCX, MTZ and NVDA for the Zacks TAZR Trader portfolio.

Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader service. Click Follow Author above to receive his latest stock research and macro analysis.



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