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Fed Hikes Rate, Growth Sectors See Surprise Gains: 5 Top Picks

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In line with market expectations, the Fed hiked the benchmark interest rate by 25 basis points. Fed’s dot plot has indicated six more hikes this year — a more hawkish tone than the December guideline. Yet the growth sectors, especially, technology and consumer discretionary, jumped after the Fed’s decision. Growth stocks are generally susceptible to higher market interest rates.

Consequently, technology or consumer discretionary stocks remain attractive from an investment point of view. Investment in technology or consumer discretionary behemoths with a favorable Zacks Rank should provide good returns going forward. Five of them are Apple Inc. (AAPL - Free Report) , Marriott International Inc. (MAR - Free Report) , NVIDIA Corp. (NVDA - Free Report) , Analog Devices Inc. (ADI - Free Report) and Micron Technology Inc. (MU - Free Report) .

Fed Raises Interest Rate

On Mar 16, the Fed announced after the completion of its 2-day FOMC meeting that it would raise the benchmark interest rate by 25 basis points effective immediately. The Fed funds flow rate will now be hiked to the range of 0.25-0.50% from 0-0.25% set by the central bank on March 2022 to combat the pandemic.

Fed’s dot-plot, a graphic representation of the views of Fed officials, indicated that six  more rate hike of the same magnitude would come this year, followed by another three in next year. The Fed projected that the benchmark interest rate would be around 1.9% by this year-end.

Moreover, the quantitative easing program of buying $120 billion of bonds per month will terminate this month. Additionally, Fed Chairman Jerome Powell indicated that the central bank would start shrinking its $9 trillion balance sheet, mostly consisting of U.S. Treasury Notes and mortgage-backed securities from May 2022. This will result in another form of rate hike.

Rate Hike Seems Factored in Market Valuation

Higher market interest rate is detrimental for stock investment specifically for growth sectors like technology and consumer discretionary. The value of these stocks generally increases over a longer period of time. A hike in market interest rate will raise the discount rate, thereby reducing the net present value of technology or consumer discretionary stocks.

However, on Mar 16, the major gainers on Wall Street were the technology and consumer discretionary sectors. The Technology Select Sector SPDR (XLK - Free Report) and the Consumer Discretionary Select Sector SPDR (XLY - Free Report) rallied 3.3% and 3.4%, respectively. On the other hand, XLK and XLY have tumbled 13.2% and 14.3% year to date.

It seems, that a 2% hike in the interest rate this year is already priced in market valuation. Wall Street has suffered significant turmoil since the beginning of 2022, in contrast to the outstanding performances in the last two pandemic-ridden years. The three major indexes — the Dow, the S&P 500 and the Nasdaq Composite — have tumbled 6.3%, 8.6% and 14.1%, respectively, year to date.

The primary reason for this disappointing performance is market participants’ expectation  of a more hawkish Fed looking to combat the mounting interest rate, which is currently at a 40-year high. The ongoing geopolitical conflict between Russia and Ukraine has exaggerated the inflationary condition. Therefore, the jump in XLK and XLY on Mar 16 indicated that a 2% hike in the Fed fund rate this year is already factored in the market’s valuation.  

Our Top Picks  

We have narrowed our search to five corporate giants from technology or consumer discretionary sectors. These companies have a robust business model, globally acclaimed brand recognition and a solid financial position to cope with a higher interest rate.

Moreover, these stocks have strong growth potential for 2022 and have seen positive earnings estimate revisions in the last 30 days, indicating sold business opportunities in the near-term. Each of our picks carries a Zacks Rank #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 year to date.

Zacks Investment Research
Image Source: Zacks Investment Research

Apple is benefiting from the continued momentum in the Services and a robust performance by iPhone, iPad, Mac, Wearables and an expanding App Store ecosystem. Although Apple’s business primarily runs around its flagship iPhone, the Services portfolio has emerged as the company’s new cash cow. AAPL currently has more than 745 million paid subscribers across its Services portfolio.

Apple is encouraging developers to use artificial intelligence and machine learning in their apps. The company’s Core ML 2 API helps developers recognize faces or animals in photos, and parse the meaning of the text. AAPL’s focus on autonomous vehicles and augmented reality/virtual reality technologies presents growth opportunities for the long haul.

Apple has an expected earnings growth rate of 9.8% for the current year (ending September 2022). The Zacks Consensus Estimate for the current year has improved 0.2% over the last 30 days.

Marriott is benefiting from its focus on expansion initiatives, digital innovation and the loyalty program. MAR is gaining from the reopening of the international borders and leniency in travel restrictions.

Marriott is consistently trying to expand its worldwide presence and capitalize on the demand for hotels in the international markets. The U.S. and global economies have reopened to a great extent as new coronavirus cases have dropped considerably. Several countries are gradually removing travel restrictions. MAR will be a major gainer of the economy’s reopening.

Marriott has an expected earnings growth rate of 73% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5.5% over the last 30 days.

NVIDIA is benefiting from the coronavirus-induced work and learn-at-home wave. NVIDIA is also benefiting from strong growth in GeForce desktop and notebook GPUs, which is boosting gaming revenues. Moreover, a surge in Hyperscale demand remains a tailwind for NVIDIA’s Data Center business.

The expansion of NVIDIA GeForce NOW is expected to drive its user base. Further, the solid uptake of AI-based smart cockpit infotainment solutions is a boon. The collaboration with Daimler-owned Mercedes-Benz is expected to strengthen NVIDIA’s presence in the autonomous vehicles and other automotive electronics spaces.

NVDA has an expected earnings growth rate of 25.2% for the current year (ending January 2023). The Zacks Consensus Estimate for current-year earnings has improved 7.8% over the last 30 days.

Analog Devices has strength across communication, consumer, industrial and automotive end-markets. Further, solid demand for high-performance analog and mixed-signal solutions is a tailwind. Growing momentum across the electric vehicle space on the back of robust Battery Management System solutions remains positive for ADI.

Further, growing power design wins are the other positives for Analog Devices. The solid momentum of the HEV platform across the cabin electronics ecosystem remains a tailwind for ADI. Moreover, Analog Devices remains optimistic about the growth prospects associated with its Maxim acquisition and 5G.

ADI has an expected earnings growth rate of 28.8% for the current year (ending October 2022). The Zacks Consensus Estimate for current-year earnings has improved 10.5% over the last 30 days.

Micron Technology is witnessing growing demand for memory chips from cloud-computing providers and acceleration in 5G cellular network adoptions. The rising mix of high-value solutions, enhancement in customer engagement and improvement in cost structure are the other growth drivers of MU.

Further, 5G adoption beyond mobile is likely to spur demand for memory and storage, particularly in Internet of Things devices and wireless infrastructure. These will act as major positives for Micron Technology going forward.

MU has an expected earnings growth rate of 47.7% for the current year (ending August 2022). The Zacks Consensus Estimate for current-year earnings improved 0.4% over the last 30 days.

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