In its latest FOMC meeting, Fed acknowledged that the U.S. economy is suffering from inflationary pressure and a rate hike may come before than expected. Consequently, stock markets dipped and yield of the 10-Year U.S. Treasury Note climbed on Jun 16.
However, three major positives are there in Fed Chairman Jerome Powell's post FOMC statement. The first is no immediate tapering of the ongoing $120 billion per month quantitative easing program. Second, a rate hike, if it happens, may not take place before late 2023. Third, Fed officials' informal discussions about a possible deviation from the existing easy-money policy are solely due to an impressive recovery of the U.S. economy, beyond the central bank's own expectations.
Inflation Appears Transitory to Fed
The latest "dot plot" — a quarterly map of each Federal Open Market Committee member’s expectations for rates over the coming years — showed that 13 out of 18 officials expect a hike in short-term interest rate in late 2023. In March, only seven officials were expecting this. Accordingly, Fed signaled that the benchmark lending rate may move upward in late 2023 instead of 2024 estimated in March.
Yet, Powell has commented that dot plots should be taken with a “big grain of salt.” It is “not a great forecaster of future rate moves." Fed's policy will be guided by the actual outcome of economic variables and not by its officials' expectations about the future.
In the June FOMC, Fed projected that the core PCE price index — Fed's favorite inflation gauge — will jump 3% year over year in the fourth quarter of 2021 compared with the 2.2% forecast in March. Most surprisingly, despite a huge jump in the inflation rate projection, Powell said, “Our expectation is these high inflation readings now will abate.”
The central bank is still expecting the recent augmentation in general price level to be transitory, resulting from global disruption in the supply-chain system and shortage of skilled labor. This is evident from the fact that the Fed expect inflation to cool down to 2.1% in 2022 and 2.2% in 2023. This is exactly what the central bank was looking for when it changed policies in Jackson Hole Symposium in August 2020.
Moreover, Fed did not provide any guideline on when it will start tapering its $120 billion per month bond-buying program. The Fed Chair reiterated that the central bank will give enough signals in advance before it actually starts tapering. It is highly unlikely that tapering will start before 2022. Also, it will take nearly a year to trim the bond-buying level to zero.
Finally, it seems that Fed is still concerned about the job market. As per May nonfarm payrolls, the unemployment rate was 5.8% and 7.6 million fewer Americans were in jobs compared with the pre-pandemic level of February 2020. Fed reaffirmed that the unemployment rate will come down to 4.5% at the end of 2021. However, considering May's job data, it is a long way to go.
Robust U.S. Economic Recovery
Supported by the nationwide COVID-19 vaccination drive, a sharp reduction in new coronavirus cases and faster-than-expected reopening of the U.S. economy, Fed raised the U.S. GDP growth rate for 2021 to 7% from 6.5% in March. Several globally recognized economic and financial agencies like the World Bank, the IMF, OECD and oxford Economics also projected the U.S. economic growth rate within the range of 6.5% to 7% for 2021, the highest in 38 years.
Moreover, corporate profits are expected to soar in 2021 and beyond. Per our projections on Jun 11, total earnings of the market's benchmark — S&P 500 Index — are expected to climb 34.8% year over year on 10.5% higher revenues in 2021 compared with a 13.1% year-over-year decline in earnings on 1.7% lower revenues in the coronavirus-ridden 2020.
Thereafter, in 2022, total earnings of the S&P Index are forecast to grow 11.2% year over year on 6.4% higher revenues and in 2023, total earnings of the S&P Index are estimated to grow 11.4% year over year on 4.9% higher revenues.
Our Top Picks
We believe that yesterday's market pull back was a temporary phenomenon. It may continue for the next few days as market participants' will fully digest the Fed Chairman's post FOMC statement. Eventually, Wall Street's northbound journey in the first five months of this year will continue for the rest of 2021.
We have narrowed down our search to five corporate bigwigs (market capital > $50 billion) that have provided better returns than the market's benchmark S&P 500 Index in the past three months. These companies have a robust business model across the world and command globally acclaimed brand values. Their strong financial positions will help them to cope with a higher interest rate.
Moreover, these stocks have strong growth potential for the rest of 2021 and have seen solid earnings estimate revisions within the last 30 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). 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 in the past three months.
Image Source: Zacks Investment Research Target Corp. ( TGT Quick Quote TGT - Free Report) has an expected earnings growth rate of 25.6% for the current year (ending January 2022). The Zacks Consensus Estimate for its current-year earnings has improved 33.8% over the last 30 days. This Zacks Rank #1 company has a current dividend yield of 1.2% and the stock price has climbed 28.7% in the past three months. NVIDIA Corp. ( NVDA Quick Quote NVDA - Free Report) has an expected earnings growth rate of 58.4% for the current year (ending January 2021). The Zacks Consensus Estimate for the current year improved 16.4% over the last 30 days. This Zacks Rank #2 company has a current dividend yield of 0.1% and the stock price has soared 40% in the past three months. The Sherwin-Williams Co. ( SHW Quick Quote SHW - Free Report) has an expected earnings growth rate of 15.1% for the current year. The Zacks Consensus Estimate for its current-year earnings has improved 0.6% over the last 30 days. This Zacks Rank #2 company has a current dividend yield of 0.8% and the stock price has appreciated 13.4% in the past three months. Danaher Corp. ( DHR Quick Quote DHR - Free Report) has an expected earnings growth rate of 41.5% for the current year. The Zacks Consensus Estimate for the current year improved 0.2% over the last 30 days. This Zacks Rank #2 company has a current dividend yield of 0.3% and the stock price has advanced 13.3% in the past three months. FedEx Corp. ( FDX Quick Quote FDX - Free Report) has an expected earnings growth rate of 13.9% for the current year (ending May 2022). The Zacks Consensus Estimate for the current year has improved 0.9% over the last 30 days. This Zacks Rank #2 company has a current dividend yield of 0.9% and the stock price has surged 11.8% in the past three months. Time to Invest in Legal Marijuana
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