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Fed Gives Bond-Buy Tapering Signal Without Timeline: 5 Picks

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On Sep 22, Wall Street closed sharply higher ending its 4-day losing streak and recouped some of the losses it has suffered in September. The three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — rallied 1% each, while the small-cap-centric Russell 2000 surged 1.5%.

U.S. stock markets rebounded following Fed Chairman Jerome Powell’s confirmation that a shift from the central bank’s ultra-dovish monetary policy is not immediate. The Fed will maintain its monetary stimulus and stick to a near-zero short-term benchmark interest rate at least for the time being.

Powell Maintains Dovish Stance

In his statement after the conclusion of the two-day FOMC meeting, Fed Chairman Jerome Powell said “If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.”

Fed Chairman made the point that it is “more important to do it right than fast.” “While no decisions were made, participants generally viewed that so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate,” he said.

Powell said that the central bank’s further progress test has been met regarding its inflation target. He added “My own view is the test for substantial further progress on employment is all but met.” However, Powell made it clear “For me it wouldn’t take a knockout, great, super strong employment report. It would take a reasonably good employment report for me to feel like that test is met.”

Fed’s latest dot plot for rate projection is showing nine out of18 members believing that the first rate cut will come in the second half of 2022. This number was just seven after June’s FOMC meeting. However, Powell had commented in June 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.

Tapering Likely Priced in Market Valuation

The Fed Chairman has said repeatedly that the central bank will give enough indication to market participants before it actually starts tapering in order to minimize volatility.

Although the Fed has restrained from providing any timeline as to when the tapering of the monthly $120 billion bond-buy program will start, many economists and financial researchers believe that the announcement will come in the next FOMC meeting in November and the process will start from December.

Despite this, yesterday’s rally indicates that the impact of tapering seems already factored in market valuations. The central bank had taken this extraordinary measure last year to tackle an extraordinary health hazard-led economic devastation. Everyone knows that this monetary stimulus will fade out gradually with the pace of U.S. economic recovery.

Therefore, a possible tapering of the Fed’s monthly $80 billion Treasury Notes and $40 billion mortgage-backed bond-buying program this year may not shake market participants’ confidence. The important point is that the Fed has taken an extremely cautious approach to tapering its quantitative easing program.

Stock Selection Criteria

At this stage, it will be prudent to invest in stocks of U.S. corporate behemoths (market capital > $100 billion) that have performed better than the market’s benchmark — the S&P 500 Index — in the past month, amid September’s volatility.

The stocks must carry a favorable Zacks Rank. These companies have highly established business models spread across the world, lucrative product pipelines, globally acclaimed brand recognition and robust financial positions, which will help them to cope with a higher interest rate.

Accordingly, we have narrowed down our search to five U.S. corporate behemoths that have strong growth potential for the rest of 2021. These stocks have seen positive earnings estimate revisions in the last 60 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 (Strong Buy) stocks here.

The chart below shows the price performance of our five picks in the past month.

Zacks Investment Research
Image Source: Zacks Investment Research

Apple Inc.'s (AAPL - Free Report) Services and Wearables businesses are expected to drive top-line growth in fiscal 2021 and beyond. Although Apple’s business primarily runs around its flagship iPhone, the Services portfolio has emerged as the company’s new cash cow. Its focus on autonomous vehicles and augmented reality/virtual reality technologies presents growth opportunities in the long haul.

This Zacks Rank #1 company has an expected earnings growth rate of 2.2% for next year (ending September 2022) after estimated 70.4% growth in the current year (ending September 2021). The Zacks Consensus Estimate for next year improved 6.3% over the last 60 days.

Microsoft Corp. (MSFT - Free Report) is introducing new and improved Surface devices that could encourage enterprises to stick with Windows as they move toward BYOD and cloud computing. Microsoft’s advantages in this respect are two-fold.

First, the company has a very large installed base of Office users. Most legacy data are based on Office, so enterprises are usually reluctant to use other productivity solutions. Second, the BYOD model is dependent on security and cloud integration, both of which are Microsoft’s strengths.

This Zacks Rank#2 company has an expected earnings growth rate of 8.4% for the current year (ending June 2022). The Zacks Consensus Estimate for current-year earnings improved 3.7% over the last 60 days.

NVIDIA Corp. (NVDA - Free Report) is benefiting from the coronavirus-induced work-from-home and learn-at-home wave. It is also benefiting from strong growth in GeForce desktop and notebook GPUs, which are boosting gaming revenues.

Moreover, a surge in Hyperscale demand remains a tailwind for the company’s Data Center business. The expansion of NVIDIA GeForce NOW is expected to drive its user base. Further, a solid uptake of artificial intelligence-based smart cockpit infotainment solutions is a boon.

This Zacks Rank #2 company has an expected earnings growth rate of 68% for the current year (ending January 2022). The Zacks Consensus Estimate for current-year earnings has improved 5.8% over the last 60 days.

Danaher Corp. (DHR - Free Report) is poised to gain from Danaher Business System (“DBS”), the policy of rewarding shareholders through dividend payments, synergistic benefits from acquired assets and investment in product innovation in the quarters ahead.

The company anticipates core revenue growth in the mid to high-teens range for the third quarter of 2021 and in the high-teens for 2021. The pandemic-led tailwinds are expected to boost core sales by high-single digits in the third quarter and by 10% in 2021.

This Zacks Rank #2 company has an expected earnings growth rate of 50.4% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1% over the last 30 days.

Costco Wholesale Corp. (COST - Free Report) operates membership warehouses in the United States, Puerto Rico, Canada, the United Kingdom, Mexico, Japan, Korea, Australia, Spain, France, Iceland, China, and Taiwan. It offers branded and private-label products in a range of merchandise categories.

Its growth strategies, better price management, decent membership trend and increasing penetration of e-commerce business reinforce its position. The strategy to sell products at discounted prices has helped to draw customers seeking both value and convenience. These factors have been aiding in registering impressive sales numbers.

This Zacks Rank #2 company has an expected earnings growth rate of 7.9% for the current year (ending August 2022). The Zacks Consensus Estimate for current-year earnings has improved 1.1% over the last 30 days.

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