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Goldilocks' Golden Run to be More Thrilling in Q2: 5 Picks
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U.S. stock markets witnessed an impressive first quarter of 2024 after an astonishing 2023. Wall Street’s bull run got an added boost this year, to the surprise of a large section of financial pandits, who indiscriminately warned of overvaluation. Now, the question is, next what? We believe, that the bulls will continue to roar, supported by a robust U.S. economy.
Solid Fundamentals of the U.S. Economy
U.S. GDP rose 2.5% in 2023 compared with a 1.9% rise in 2022. At the beginning of 2023, the consensus estimate for full-year GDP was 2%. On Mar 29, the Atlanta Fed GDPNow tracker forecast a 2.3% growth rate for first-quarter 2024, indicating, no chance of a near-term recession. Moreover, the Fed raised the U.S. GDP forecast for 2024 to 2.1% in the March FOMC meeting from 1.4% in December 2023.
The core PCE inflation rate (excluding volatile food and energy items) — Fed’s favorite inflation gauge — rose 0.3% month over month in February compared with 0.5% in the previous month. Year over year, core PCE inflation rose 2.8% in February compared with 2.9% in January. Fed Chairman Jerome Powell said that the data was in line with the central bank’s expectations.
Peak inflation is far behind us. The labor market remains resilient. Moreover, personal consumption expenditure — the largest driver of the GDP — increased 0.8% month over month in February, compared with the consensus estimate of 0.5% and a 0.2% increase in January.
AI Saga to Continue in the Long Term
The ongoing tech rally since the beginning of 2023 was led by a massive thrust toward artificial intelligence (AI), especially generative AI. The rapid penetration of digital technologies and the Internet worldwide during the lockdown period, ushered in significant adoption of AI.
We believe the AI space is yet to unfold in the United States and international markets. Once that happens, it will generate huge business opportunities for technology companies producing high-end products.
Smart devices need computing and learning capabilities to perform face detection, image recognition and video analytics capabilities. These require high processing power, speed and memory, low power consumption, and better graphic processors and solutions, which bode well for the AI-powered semiconductor industry.
Strong Expectations for Q1 2024 Earnings
The first-quarter 2024 earnings season will kick off within two weeks. Wall Street is set to see a positive earnings season for three quarters in a row. Total S&P 500 earnings for the first quarter of 2024 are expected to be up 2.5% from the same period last year on 3.5% higher revenues.
This follows the 6.7% year-over-year earnings growth on 3.9% higher revenues in fourth-quarter 2023 and 3.8% year-over-year earnings growth on 2.1% higher revenues in third-quarter 2023.
Fed’s Rate Cut Indications
On Mar 20, after the FOMC meeting, the Fed kept the benchmark lending rate constant in the range of 5.25-5.5%. The range of the Fed fund rate has been steady since July 2023.
However, the Fed’s latest “dot-plot” (a closely watched matrix of anonymous projections from the 19 officials who comprise the FOMC) shows the benchmark lending rate coming down to 4.625% at mid-point by the end of 2024. The existing mid-point of the Fed fund rate is 5.375%. This indicates three rate cuts of 25 basis points each.
Our Top Picks
Despite higher valuation, the tech rally is likely to gather more pace in 2024 as a low market rate of interest always boosts growth stocks like technology. We have narrowed our search to five technology behemoths (market capital > $100 billion) that have provided double-digit returns year to date. These companies have a robust business model, a solid financial position and globally acclaimed brand value.
These stocks have strong growth potential for 2024 and have seen positive earnings estimate revisions in the last 60 days. Finally, 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 year to date.
Image Source: Zacks Investment Research
NVIDIA Corp.’s (NVDA - Free Report) Compute & Networking revenues are gaining from the strong growth of AI, high-performance and accelerated computing. The data center end-market business is likely to benefit from the growing demand for generative AI and large language models using graphic processing units based on NVIDIA Hopper and Ampere architectures.
A surge in hyperscale demand and higher sell-ins to partners across the Gaming and ProViz end markets following the normalization of channel inventory are acting as tailwinds for NVDA. Collaborations with Mercedes-Benz and Audi are likely to advance NVDA’s presence in autonomous vehicles and other automotive electronics space.
Zacks Rank #1 NVIDIA has an expected revenue and earnings growth rate of 72.6% and 84%, respectively, for the current year (ending January 2025). The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last seven days. The stock price of NVDA has soared 82.5% year to date.
Meta Platforms Inc. (META - Free Report) is benefiting from steady user growth across all regions, particularly Asia Pacific. Increased engagement with its offerings like Instagram, WhatsApp, Messenger and Facebook has been a major growth driver. META is leveraging AI to recommend Reels content, which is driving traffic on Instagram and Facebook.
META’s innovative portfolio, which includes Threads, Reels, Llama 2 and Ray-Ban Meta smart glass, and mixed reality device Quest 3, is likely to aid growth. Reels continue to do very well across Instagram and Facebook. People reshared Reels 3.5 billion times every day during the fourth quarter.
Zacks Rank #1 Meta Platforms has an expected revenue and earnings growth rate of 17.7% and 34.1%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.6% over the last 60 days. The stock price of META has climbed 37.2% year to date.
Micron Technology Inc. (MU - Free Report) has enhanced its chip packages with AI, machine learning and deep learning. Using AI and analytics, MU has produced hardware with increased storage capacity, faster memory, and high-quality data filtering.
The expectation of supply normalization by mid-year 2024 is likely to drive pricing, while the boom in AI spending is expected to fuel demand for MU’s chips in the data center end market. Additionally, 5G adoption in the IoT devices and wireless infrastructure is likely to spur demand for MU’s memory and storage.
Zacks Rank #2 Micron Technology has an expected revenue and earnings growth rate of 55.6% and more than 100%, respectively, for the current year (ending August 2024). The Zacks Consensus Estimate for current-year earnings has improved more than 100% over the last 30 days. The stock price of MU has jumped 38.2% year to date.
Microsoft Corp. (MSFT - Free Report) is riding on strong growth from Intelligent Cloud and Productivity and Business Processes. Intelligent Cloud revenues are driven by growth in Azure and other cloud services. MSFT’s Productivity and Business Processes revenues continue to increase due to the strong adoption of Office 365 Commercial solutions.
Continued momentum in the small and medium businesses and frontline worker offerings, as well as a rise in revenue per user, are drivers of top-line growth. MSFT got off to an early lead in the generative AI race, thanks to its work with OpenAI. The general availability of Copilot for Security holds promises. We expect fiscal 2024 net sales to grow 14.6% from fiscal 2023.
Zacks Rank #2 Microsoft has an expected revenue and earnings growth rate of 15% and 18.6%, respectively, for the current year (ending June 2024). The Zacks Consensus Estimate for current-year earnings has improved 4.3% over the last 60 days. The stock price of MSFT has rallied 11.9% year to date.
Amazon.com Inc. (AMZN - Free Report) has benefited from Prime and AWS’ momentum. The strengthening AWS services portfolio and its growing adoption rate have contributed to the performance of AMZN. Ultrafast delivery services and an expanding content portfolio have been beneficial. Strengthening relationships with third-party sellers have also favored the company. AMZN’s robust advertising business has contributed as well.
Notably, improving Alexa skills along with robust smart home product offerings continue to act as a tailwind. AMZN’s strong global presence and solid momentum among small and medium businesses remain positive. Growing capabilities in grocery, pharmacy, healthcare and autonomous driving are the other catalysts. Also, its deepening focus on generative AI is a major plus.
Zacks Rank #2 Amazon has an expected revenue and earnings growth rate of 11.6% and 40.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.5% over the last 30 days. The stock price of AMZN has surged 18.8% year to date.
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Goldilocks' Golden Run to be More Thrilling in Q2: 5 Picks
U.S. stock markets witnessed an impressive first quarter of 2024 after an astonishing 2023. Wall Street’s bull run got an added boost this year, to the surprise of a large section of financial pandits, who indiscriminately warned of overvaluation. Now, the question is, next what? We believe, that the bulls will continue to roar, supported by a robust U.S. economy.
Solid Fundamentals of the U.S. Economy
U.S. GDP rose 2.5% in 2023 compared with a 1.9% rise in 2022. At the beginning of 2023, the consensus estimate for full-year GDP was 2%. On Mar 29, the Atlanta Fed GDPNow tracker forecast a 2.3% growth rate for first-quarter 2024, indicating, no chance of a near-term recession. Moreover, the Fed raised the U.S. GDP forecast for 2024 to 2.1% in the March FOMC meeting from 1.4% in December 2023.
The core PCE inflation rate (excluding volatile food and energy items) — Fed’s favorite inflation gauge — rose 0.3% month over month in February compared with 0.5% in the previous month. Year over year, core PCE inflation rose 2.8% in February compared with 2.9% in January. Fed Chairman Jerome Powell said that the data was in line with the central bank’s expectations.
Peak inflation is far behind us. The labor market remains resilient. Moreover, personal consumption expenditure — the largest driver of the GDP — increased 0.8% month over month in February, compared with the consensus estimate of 0.5% and a 0.2% increase in January.
AI Saga to Continue in the Long Term
The ongoing tech rally since the beginning of 2023 was led by a massive thrust toward artificial intelligence (AI), especially generative AI. The rapid penetration of digital technologies and the Internet worldwide during the lockdown period, ushered in significant adoption of AI.
We believe the AI space is yet to unfold in the United States and international markets. Once that happens, it will generate huge business opportunities for technology companies producing high-end products.
Smart devices need computing and learning capabilities to perform face detection, image recognition and video analytics capabilities. These require high processing power, speed and memory, low power consumption, and better graphic processors and solutions, which bode well for the AI-powered semiconductor industry.
Strong Expectations for Q1 2024 Earnings
The first-quarter 2024 earnings season will kick off within two weeks. Wall Street is set to see a positive earnings season for three quarters in a row. Total S&P 500 earnings for the first quarter of 2024 are expected to be up 2.5% from the same period last year on 3.5% higher revenues.
This follows the 6.7% year-over-year earnings growth on 3.9% higher revenues in fourth-quarter 2023 and 3.8% year-over-year earnings growth on 2.1% higher revenues in third-quarter 2023.
Fed’s Rate Cut Indications
On Mar 20, after the FOMC meeting, the Fed kept the benchmark lending rate constant in the range of 5.25-5.5%. The range of the Fed fund rate has been steady since July 2023.
However, the Fed’s latest “dot-plot” (a closely watched matrix of anonymous projections from the 19 officials who comprise the FOMC) shows the benchmark lending rate coming down to 4.625% at mid-point by the end of 2024. The existing mid-point of the Fed fund rate is 5.375%. This indicates three rate cuts of 25 basis points each.
Our Top Picks
Despite higher valuation, the tech rally is likely to gather more pace in 2024 as a low market rate of interest always boosts growth stocks like technology. We have narrowed our search to five technology behemoths (market capital > $100 billion) that have provided double-digit returns year to date. These companies have a robust business model, a solid financial position and globally acclaimed brand value.
These stocks have strong growth potential for 2024 and have seen positive earnings estimate revisions in the last 60 days. Finally, 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 year to date.
Image Source: Zacks Investment Research
NVIDIA Corp.’s (NVDA - Free Report) Compute & Networking revenues are gaining from the strong growth of AI, high-performance and accelerated computing. The data center end-market business is likely to benefit from the growing demand for generative AI and large language models using graphic processing units based on NVIDIA Hopper and Ampere architectures.
A surge in hyperscale demand and higher sell-ins to partners across the Gaming and ProViz end markets following the normalization of channel inventory are acting as tailwinds for NVDA. Collaborations with Mercedes-Benz and Audi are likely to advance NVDA’s presence in autonomous vehicles and other automotive electronics space.
Zacks Rank #1 NVIDIA has an expected revenue and earnings growth rate of 72.6% and 84%, respectively, for the current year (ending January 2025). The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last seven days. The stock price of NVDA has soared 82.5% year to date.
Meta Platforms Inc. (META - Free Report) is benefiting from steady user growth across all regions, particularly Asia Pacific. Increased engagement with its offerings like Instagram, WhatsApp, Messenger and Facebook has been a major growth driver. META is leveraging AI to recommend Reels content, which is driving traffic on Instagram and Facebook.
META’s innovative portfolio, which includes Threads, Reels, Llama 2 and Ray-Ban Meta smart glass, and mixed reality device Quest 3, is likely to aid growth. Reels continue to do very well across Instagram and Facebook. People reshared Reels 3.5 billion times every day during the fourth quarter.
Zacks Rank #1 Meta Platforms has an expected revenue and earnings growth rate of 17.7% and 34.1%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.6% over the last 60 days. The stock price of META has climbed 37.2% year to date.
Micron Technology Inc. (MU - Free Report) has enhanced its chip packages with AI, machine learning and deep learning. Using AI and analytics, MU has produced hardware with increased storage capacity, faster memory, and high-quality data filtering.
The expectation of supply normalization by mid-year 2024 is likely to drive pricing, while the boom in AI spending is expected to fuel demand for MU’s chips in the data center end market. Additionally, 5G adoption in the IoT devices and wireless infrastructure is likely to spur demand for MU’s memory and storage.
Zacks Rank #2 Micron Technology has an expected revenue and earnings growth rate of 55.6% and more than 100%, respectively, for the current year (ending August 2024). The Zacks Consensus Estimate for current-year earnings has improved more than 100% over the last 30 days. The stock price of MU has jumped 38.2% year to date.
Microsoft Corp. (MSFT - Free Report) is riding on strong growth from Intelligent Cloud and Productivity and Business Processes. Intelligent Cloud revenues are driven by growth in Azure and other cloud services. MSFT’s Productivity and Business Processes revenues continue to increase due to the strong adoption of Office 365 Commercial solutions.
Continued momentum in the small and medium businesses and frontline worker offerings, as well as a rise in revenue per user, are drivers of top-line growth. MSFT got off to an early lead in the generative AI race, thanks to its work with OpenAI. The general availability of Copilot for Security holds promises. We expect fiscal 2024 net sales to grow 14.6% from fiscal 2023.
Zacks Rank #2 Microsoft has an expected revenue and earnings growth rate of 15% and 18.6%, respectively, for the current year (ending June 2024). The Zacks Consensus Estimate for current-year earnings has improved 4.3% over the last 60 days. The stock price of MSFT has rallied 11.9% year to date.
Amazon.com Inc. (AMZN - Free Report) has benefited from Prime and AWS’ momentum. The strengthening AWS services portfolio and its growing adoption rate have contributed to the performance of AMZN. Ultrafast delivery services and an expanding content portfolio have been beneficial. Strengthening relationships with third-party sellers have also favored the company. AMZN’s robust advertising business has contributed as well.
Notably, improving Alexa skills along with robust smart home product offerings continue to act as a tailwind. AMZN’s strong global presence and solid momentum among small and medium businesses remain positive. Growing capabilities in grocery, pharmacy, healthcare and autonomous driving are the other catalysts. Also, its deepening focus on generative AI is a major plus.
Zacks Rank #2 Amazon has an expected revenue and earnings growth rate of 11.6% and 40.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.5% over the last 30 days. The stock price of AMZN has surged 18.8% year to date.