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Swift Boat in the Form of Tax Cuts: Zacks March Market Strategy

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The following is an excerpt from Zacks Chief Strategist John Blank’s full March Market Strategy report To access the full PDF, click here.

Strong February Jobs Report

Clearly, February was a very strong jobs report, particularly for a winter month.  Consensus was looking for +200K out of February. It got +313K.

We saw big hiring strength, not only in total job additions, but also across multiple sectors of the economy. The Construction sector was hot. Retail did better than expected. Professional Services and Manufacturing did great.

Wage growth cooling to 2.6% from 2.8% was a dovish factor. Since inflation is the real issue for financial markets, this cooling sets back those thinking there will be four Fed rate hikes this year. That kept the bond markets under control. 

However, the 10-year U.S. Treasury rate did move up to 2.90% (4 basis points) on the news. That wasn’t a new high for 2018, though. 2.95% is that level.

3.0% will cause the big concern down the road.

What’s Driving Up Earnings Estimates – So Fast?

We have not seen S&P 500 index earnings estimates get cranked up this fast, going into a year.

The first quarter of 2018 marked the largest increase in the bottom-up EPS estimates over the first two months of a quarter since tracking began on the quarterly bottom-up EPS estimate in Q2-2002.

Analysts have not only increased EPS estimates for Q1-2018, but also for the full year. From Dec. 31st through Feb. 28th, the current year 2018 bottom-up EPS estimate increased by +7.3% to $157.97 from $147.24.

This is the largest increase in the annual EPS estimate for the index over the first two months of the year since tracking began on the annual bottom-up EPS estimate in 1996.

What is driving the increase in the bottom-up EPS estimate for Q1 2018 and current year 2018?

The decrease in the corporate tax rate for 2018 due to the new tax law is clearly a significant factor in the upward revisions to EPS estimates.

The rapid increase in earnings expectations for Q1 2018 and current year 2018 occurred just after the tax bill was signed into law. However, it is difficult to quantify the exact impact of the changes in the tax rate on the upward revisions.

Other factors also have fueled the increase in earnings estimates as well.

Rising oil prices through the month of January contributed to the large increase in earnings estimates for companies in the Energy sector.

Expectations for higher interest rates in 2018 also contributed to the significant increase in earnings estimates for companies in the Financials sector.

March 2018 – Zacks Sector/Industry/Company Telescope

A very strong and successful earnings season has wrapped.

After that full set of data is in, both March and February Zacks sector and industry ranks look much the same.

The recent and coming strong earnings seasons can be seen in the number (5 of 10) of Very Attractive sectors and 3 Attractive Sectors. We mostly see this earnings estimate pickup via President Trump’s corporate and personal tax cuts. Strong results are also based on strong global tailwinds.

Very Attractive sectors this month: Info Tech, Industrials, Financials, Energy and Materials. Energy, Materials and Tech see the strongest global tailwinds.

Industrials run hot on Transportation, Aerospace and Machinery investment (a follow-through on a +11.4% rise in Business Investment in Q4). Financials are the biggest benefactor of lower domestic corporate profit taxes and rising rates.

Falling sectors: Telcos and Utilities. These are the usual deep defensives.

1) Info Tech stays HOT and Very Attractive. Semi-conductors stay as a top niche again in March. Computer-Software Services is a new hot Tech industry to watch.

Tokyo Electron (TOELY - Free Report) ): Tokyo Electron Ltd. (TEL) is a company mainly engaged in the manufacture and sale of electronic products for industrial uses. TEL is the largest manufacturer of Integrated Circuit (IC) and Flat Panel Display (FPD) production equipment in Japan and the third largest in the world.

(2) Industrials stay Very Attractive. The numerous leaders are: Airlines, Aerospace, Construction, Railroads, Metal Fab, Railroads and Machinery.

XPO Logistics (XPO - Free Report) ): XPO Logistics, Inc. is a third-party logistics provider offering expedient, single-source solutions for time-critical and service-sensitive shipments through its non-asset based transportation network. XPO serves customers in the U.S, Canada and Mexico with domestic and international freight destinations.

(3) Financials stay Very Attractive. The strong spots are Investment Banking, Finance, and Insurance. Banks-Major Regional is strong, too.

Ally Financial (ALLY - Free Report) ): Ally Financial Inc. is an automotive financial services company. Its automotive services business offers a full suite of financing products and services, including new and used vehicle inventory and consumer financing, leasing, inventory insurance, commercial loans and vehicle remarketing services.

(4) Energy stays Very Attractive. Oil & Gas Integrated, Coal, Oil Misc. and Oil E&P lead. Notably – and a future sign: Drillers and Pipelines are unattractive.

(5) Materials stay Very Attractive. The leaders are Paper, Steel and Containers & Glass.

(6) Consumer Discretionary stays Attractive. Leaders are Home Furnishing-Appliance, Publishing and Leisure Services.

(7) Health Care rises to Attractive. The very clear leader now is Medical Care.

(8) Consumer Staples rises back to Attractive. The best industries are Tobacco and Food/Drug Retail.

(9) Telco Services are Very Unattractive.

(10) Utilities are Very Unattractive.




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