As the third quarter is about to wrap up, the U.S. stock markets continue to post modest gains driven by an improving economy. We note that all the three major indexes - S&P 500, Dow Jones Industrial Average and NASDAQ - are in black. They have posted 13.1%, 12.6% and 15.1% one-year gains, respectively.
Notably, consumer confidence is now at its highest level since the recession as the index surged for the second consecutive month in September. Moreover, higher wages are driving up consumer spending which is significantly positive for the overall health of the economy. (Read More: Is an Improving Economy Driving Consumer Staples Stocks?)
A Sturdy Economy to Boost Stocks
The rising consumer confidence indicates that the economic recovery will continue at a steady pace. Analysts expect gross domestic product (GDP) to improve over the third and fourth quarter of 2016, which will boost stock prices as investors anticipate earnings growth.
Moreover, anticipated improvement in Oil prices post the reported agreement between OPEC members to limit production is positive for the U.S economy. Per Reuters, the OPEC members reached an agreement to limit production to a range of 32.5 million to 33.0 million barrels per day, down slightly from its current estimated output at 33.24 million barrels a day.
Meanwhile, Federal Reserve’s continuing accommodative stance is favorable for stocks with higher dividend payouts. Moreover, lower mortgage rates continue to fuel housing recovery.
Market Volatility Expected to Increase
Per Fidelity “The current U.S. expansion is a mix of mid- and late-cycle dynamics, with tighter bank credit for businesses and profit-margin pressures evidence of late-cycle indicators.” Hence, the mature U.S. business cycle along with political uncertainty due to the upcoming presidential elections is expected to increase market volatility going ahead in 2016.
The heightened market volatility will make investing in stocks challenging for investors. Success will depend on identifying stocks that either have sustainable long-term earnings growth potential based on an established business model or have a high dividend pay-out ratio.
Here we pick three well established stocks that are well poised to outperform the market going ahead. They also have a favorable Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Intel Corporation (INTC - Free Report) – Intel is one of the world’s largest semiconductor companies. The company’s growing focus into areas with better growth prospects, such as the data center, artificial intelligence (AI) and Internet of Things (IoT) businesses are key catalysts.
Intel sports a Zacks Rank #1. The EPS estimate for the current year surged by a dime (4%) to $2.61 per share over the last 60 days. The company’s dividend pay-out is 2.80%.
- Long-term growth : 7.8%
- One-year Return : 28.6%
- Last EPS Surprise: 11.32%
- Average 4-quarter Surprise: 11.86%
Amazon.com Inc (AMZN - Free Report) – Amazon has expanded beyond product searches and shopping to explore new areas like mobile technology and home automation that promises rapid growth. It has also made its way into drone delivery and content creation spaces.
Amazon has a Zacks Rank #2. The EPS estimate for the current year has surged a dime (1.9%) to $5.77 per share over the last 60 days.
- Long-term growth : 35%
- One-year Return : 62%
- Last EPS Surprise: 56.14%
- Average 4-quarter Surprise: 90.92%
McDonald's Corp. (MCD - Free Report) – McDonald's is well positioned to benefit from the rising consumer spending. The company’s transition to a franchise-based business model will reduce capital requirements and facilitate earnings growth as well as ROE expansion, over the long term.
McDonald's also carries a Zacks Rank #2. The EPS estimate for the current year increased by four cents (0.7%) to $5.57 per share over the last 60 days. The company’s dividend pay-out ratio is 3.05%.
- Long-term growth : 9.7%
- One-year Return : 21.3%
- Last EPS Surprise: 5.07%
- Average 4-quarter Surprise: 6.35%
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