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Dow Likely to Continue Outperforming Peers in 2023: 5 Picks
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Volatility persists in U.S. stock markets after 2022 wrapped up as the worst year since 2008, terminating a three-year winning streak. Major stock indexes suffered a huge blow last year as inflation remained stuck at its 40-year high level. The pandemic-led destruction of the global supply-chain system amid strong demand from U.S. citizens due to unprecedented fiscal and monetary stimuli and aggressive interest rate hikes by major central banks led by the Fed resulted in almost day-to-day fluctuations.
Dow Suffers the Least in 2022
Last year, the Dow fell 8.8% year over year and 10.3% from its record high. The S&P 500 tumbled 19.4% year over year and more than 20% from its all-time high. The Nasdaq Composite plummeted 33.1% year over year and 32.9% from its all-time high.
The primary concern of the U.S. economy was soaring inflation which is currently at its 40-year high. In order to combat mounting inflation, in 2022, the Fed raised the benchmark interest rate by 4.25%, which took the range of the Fed fund rate to 4.25-4.5%.
The Fed terminated the quantitative easing program of buying $120 billion of bonds per month in March and reduced the size of its $9 trillion balance sheet by $364 billion. Consequently, the yield on the benchmark 10-Year U.S. Treasury Note reached as high as 4.33% once a time.
A higher interest rate is detrimental to growth stocks, especially the technology players. In contrast to the Nasdaq Composite and the S&P 500 indexes, the 30-stock Dow is more inclined to cyclical stocks than growth stocks. Therefore, the index has suffered the least.
Dow Likely to Repeat Performance in 2023
The central bank projected in December that the terminal rate would top out at 5.25% before it takes a call on pausing the hikes. This is higher than the September forecast of 4.75%. No rate cut is expected before 2024.
Fed Chairman Jerome Powell reiterated that the central bank would pursue aggressive interest rate hikes and tighter momentary control policies until inflation comes down to at least near its 2% target level. A marginal decline in the inflation rate has no meaningful implication for the Fed.
Market participants are expecting more softness in consumer spending and a decline in business spending due to a margin squeeze resulting in moderate GDP growth. Powell also warned of some toughness going forward.
As a result, growth and momentum stocks are likely to underperform in 2023 and cyclical value stocks will take centerstage. Consequently, the Dow is likely to outperforms its peers in 2023 too.
The chart below shows the price performance of our five picks in the past three months.
Image Source: Zacks Investment Research
Caterpillar Inc. (CAT - Free Report) ’s revenues and earnings grew year over year for six straight quarters thanks to its cost-saving actions, strong end-market demand and pricing actions that offset the impact of the ongoing supply-chain snarls and cost pressures. The Construction Industries space is expected to benefit from rising construction activities in the United States and other parts of the world.
Backed by demand for commodities fueled by the energy-transition trend, a thriving mining sector will aid the Resource Industries segment. CAT’s dividend yield and payout ratio are higher than its peers. A strong liquidity position, investments in expanding services and digital initiatives should help Caterpillar deliver outsized returns.
Caterpillar has an expected earnings growth rate of 10.2% for the current year and a long-term earnings growth rate of 12%.
salesforce.com inc. (CRM - Free Report) is benefiting from a robust demand environment as customers are undergoing a major digital transformation. The rapid adoption of its cloud-based solutions is driving demand for CRM’s products. CRM’s sustained focus on introducing more aligned products as per customer needs is driving its top-line.
Continued deal wins in the international market are the other growth drivers. The acquisition of Slack would position salesforce.com as a leader in the enterprise team collaboration solution space and help it compete better with Microsoft’s Teams product. We expect CRM revenues to witness a CAGR of 12.5% during fiscal 2023-2025.
salesforce.com has an expected earnings growth rate of 14.7% for next year (ending January 2024) and a long-term earnings growth rate of 16.8%.
International Business Machines Corp. (IBM - Free Report) is likely to witness growth driven primarily by analytics, cloud computing, and security in the long haul. Synergies from the Red Hat buyout are boosting the competitive position of IBM in the hybrid cloud market.
International Business Machines is likely to benefit from the robust adoption and broad-based availability of IBM Blockchain World Wire — a blockchain-driven global payments network aimed at accelerating and optimizing cross-border payments. IBM is also poised to gain from the spin-off of the legacy infrastructure services business as it focuses on the hybrid cloud strategy.
International Business Machines has an expected earnings growth rate of 6.3% for the current year and a long-term earnings growth rate of 6.6%.
The Procter & Gamble Co. (PG - Free Report) has benefitted from robust pricing and a favorable mix, along with strength across segments. PG’s products play a key role in meeting the daily health, hygiene and cleaning needs of consumers around the world. PG witnessed continued strong momentum as reflected by underlying strength in brands and appropriate strategies, which aided its organic sales growth.
Procter & Gamble remains focused on productivity and cost-saving plans to boost margins. Its continued investment in business alongside efforts to offset macro cost headwinds and balance top and bottom-line growth underscores its productivity efforts. PG is witnessing cost savings and efficiency improvements across all facets of the business.
Procter & Gamble has an expected earnings growth rate of 0.3% for the current year (ending June 2023) and a long-term earnings growth rate of 6%.
NIKE Inc. (NKE - Free Report) boasts a robust surprise trend, which continued in first-quarter fiscal 2023. NKE gained from brand strength, robust consumer demand and an innovative product pipeline. Its Consumer Direct Acceleration strategy, along with robust performance in its digital and DTC businesses also aided results.
The NIKE Direct business benefited from double-digit currency-neutral growth in North America, EMEA and APLA, offset by weakness in Greater China. NKE has been benefiting from its efficient digital ecosystem, which comprises its online site as well as commercial and activity apps.
NIKE has an expected earnings growth rate of 25.4% for next year (ending May 2024) and a long-term earnings growth rate of 9.6%.
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Dow Likely to Continue Outperforming Peers in 2023: 5 Picks
Volatility persists in U.S. stock markets after 2022 wrapped up as the worst year since 2008, terminating a three-year winning streak. Major stock indexes suffered a huge blow last year as inflation remained stuck at its 40-year high level. The pandemic-led destruction of the global supply-chain system amid strong demand from U.S. citizens due to unprecedented fiscal and monetary stimuli and aggressive interest rate hikes by major central banks led by the Fed resulted in almost day-to-day fluctuations.
Dow Suffers the Least in 2022
Last year, the Dow fell 8.8% year over year and 10.3% from its record high. The S&P 500 tumbled 19.4% year over year and more than 20% from its all-time high. The Nasdaq Composite plummeted 33.1% year over year and 32.9% from its all-time high.
The primary concern of the U.S. economy was soaring inflation which is currently at its 40-year high. In order to combat mounting inflation, in 2022, the Fed raised the benchmark interest rate by 4.25%, which took the range of the Fed fund rate to 4.25-4.5%.
The Fed terminated the quantitative easing program of buying $120 billion of bonds per month in March and reduced the size of its $9 trillion balance sheet by $364 billion. Consequently, the yield on the benchmark 10-Year U.S. Treasury Note reached as high as 4.33% once a time.
A higher interest rate is detrimental to growth stocks, especially the technology players. In contrast to the Nasdaq Composite and the S&P 500 indexes, the 30-stock Dow is more inclined to cyclical stocks than growth stocks. Therefore, the index has suffered the least.
Dow Likely to Repeat Performance in 2023
The central bank projected in December that the terminal rate would top out at 5.25% before it takes a call on pausing the hikes. This is higher than the September forecast of 4.75%. No rate cut is expected before 2024.
Fed Chairman Jerome Powell reiterated that the central bank would pursue aggressive interest rate hikes and tighter momentary control policies until inflation comes down to at least near its 2% target level. A marginal decline in the inflation rate has no meaningful implication for the Fed.
Market participants are expecting more softness in consumer spending and a decline in business spending due to a margin squeeze resulting in moderate GDP growth. Powell also warned of some toughness going forward.
As a result, growth and momentum stocks are likely to underperform in 2023 and cyclical value stocks will take centerstage. Consequently, the Dow is likely to outperforms its peers in 2023 too.
Our Top Picks
We have narrowed our search to five Dow stocks. These stocks have solid potential for 2023 as well as for the long-term (3 to 5 years). 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 in the past three months.
Image Source: Zacks Investment Research
Caterpillar Inc. (CAT - Free Report) ’s revenues and earnings grew year over year for six straight quarters thanks to its cost-saving actions, strong end-market demand and pricing actions that offset the impact of the ongoing supply-chain snarls and cost pressures. The Construction Industries space is expected to benefit from rising construction activities in the United States and other parts of the world.
Backed by demand for commodities fueled by the energy-transition trend, a thriving mining sector will aid the Resource Industries segment. CAT’s dividend yield and payout ratio are higher than its peers. A strong liquidity position, investments in expanding services and digital initiatives should help Caterpillar deliver outsized returns.
Caterpillar has an expected earnings growth rate of 10.2% for the current year and a long-term earnings growth rate of 12%.
salesforce.com inc. (CRM - Free Report) is benefiting from a robust demand environment as customers are undergoing a major digital transformation. The rapid adoption of its cloud-based solutions is driving demand for CRM’s products. CRM’s sustained focus on introducing more aligned products as per customer needs is driving its top-line.
Continued deal wins in the international market are the other growth drivers. The acquisition of Slack would position salesforce.com as a leader in the enterprise team collaboration solution space and help it compete better with Microsoft’s Teams product. We expect CRM revenues to witness a CAGR of 12.5% during fiscal 2023-2025.
salesforce.com has an expected earnings growth rate of 14.7% for next year (ending January 2024) and a long-term earnings growth rate of 16.8%.
International Business Machines Corp. (IBM - Free Report) is likely to witness growth driven primarily by analytics, cloud computing, and security in the long haul. Synergies from the Red Hat buyout are boosting the competitive position of IBM in the hybrid cloud market.
International Business Machines is likely to benefit from the robust adoption and broad-based availability of IBM Blockchain World Wire — a blockchain-driven global payments network aimed at accelerating and optimizing cross-border payments. IBM is also poised to gain from the spin-off of the legacy infrastructure services business as it focuses on the hybrid cloud strategy.
International Business Machines has an expected earnings growth rate of 6.3% for the current year and a long-term earnings growth rate of 6.6%.
The Procter & Gamble Co. (PG - Free Report) has benefitted from robust pricing and a favorable mix, along with strength across segments. PG’s products play a key role in meeting the daily health, hygiene and cleaning needs of consumers around the world. PG witnessed continued strong momentum as reflected by underlying strength in brands and appropriate strategies, which aided its organic sales growth.
Procter & Gamble remains focused on productivity and cost-saving plans to boost margins. Its continued investment in business alongside efforts to offset macro cost headwinds and balance top and bottom-line growth underscores its productivity efforts. PG is witnessing cost savings and efficiency improvements across all facets of the business.
Procter & Gamble has an expected earnings growth rate of 0.3% for the current year (ending June 2023) and a long-term earnings growth rate of 6%.
NIKE Inc. (NKE - Free Report) boasts a robust surprise trend, which continued in first-quarter fiscal 2023. NKE gained from brand strength, robust consumer demand and an innovative product pipeline. Its Consumer Direct Acceleration strategy, along with robust performance in its digital and DTC businesses also aided results.
The NIKE Direct business benefited from double-digit currency-neutral growth in North America, EMEA and APLA, offset by weakness in Greater China. NKE has been benefiting from its efficient digital ecosystem, which comprises its online site as well as commercial and activity apps.
NIKE has an expected earnings growth rate of 25.4% for next year (ending May 2024) and a long-term earnings growth rate of 9.6%.