The Dow continues its bull run, carving its 21st record high this year. Such gains not only came on the back of Trump’s pro-Wall Street polices but also on upbeat earnings results. In fact, corporate profits and revenues are expected to climb further for companies amid reasonably solid economic fundamentals. The labor market slack is diminishing and the general observation about the U.S. economy remains positive.
But, some may argue that it is the late stage of the bull market citing the pullback for big technology stocks that began just over a week ago. However, tech stocks themselves are yet to recover in terms of market share lost during the dot.com bubble. Energy shares, in the meanwhile, regained strength after oil prices went up after some producers curtailed exports and U.S. drillers slowed down the process of rig addition. Energy behemoths, Exxon Mobil Corporation (XOM - Free Report) and Chevron Corporation (CVX - Free Report) , contributed significantly toward Dow’s latest all-time high. Such promising trends are expected to further aid the blue chip index’s northward movement.
Are U.S. Stocks Poised to Gain 10%?
The Dow Jones Industrial Average has, yet again, touched an all-time high this year, gaining 24.38 points or 0.1% to close at 21,384.28 on Jun 16. The record setting streak, no doubt, has raised questions about how long this bull run can continue. After all, a net 84% of investors believe that the U.S. is the most overvalued stock region, according to the latest fund-manager survey from Bank of America Merrill Lynch. But, the rally isn’t over yet, according to multibillion dollar fund manager Jim McCaughan, CEO of Principal Global Investors, which oversees $424 billion in assets.
He believes that U.S. stocks could rise 10% to 20% this year, setting the Dow to rally more than 10% in the second half of this year. Dow is already up around 8% this year, partly on hopes that President Trump can deliver the promised business-friendly policies including tax cuts, deregulation and uptick in infrastructure outlays.
McCaughan also believes that there is a bigger catalyst, which will drive the broader markets north. And that is none other than solid corporate earnings.
Corporate Profits Are Climbing
Corporate profits have not only improved in the first quarter but are also positioned to gain further in the long run. Revenue growth has also remained strong for companies, which offers a more sustainable and healthier route toward gains. Also, if the White House is able to successfully implement its pro-growth policies, profits could scale higher.
Total earnings for the second quarter are expected to be up 5.7% from the same period last year on 6.5% higher revenues. Lest we forget, in the first quarter, total earnings rose 13.4% from the same period last year on 7.1% higher revenues, with 72.5% beating EPS estimates and 65.5% surpassing revenue estimates. This followed 7.4% earnings growth in the fourth quarter of 2016 on 3.7% revenue growth, the highest in almost two years (read more: Earnings Growth to Continue in Q2).
U.S. Economy Confidence Positive
Brad McMillan, chief investment officer at Commonwealth Financial Network stated that even if he has concerns that companies have overheated, solid economic fundamentals will support the stock market. Consistent job growth and low unemployment rate are some of the bright spots.
Job additions, did, decline to 138,000 in May, much lower than the consensus estimate of 184,000. Additionally, April’s figures were revised downward from 211,000 to 174,000 while March’s job additions fell from 79,000 to 50,000. But, several economists believe that the situation is not as grim as it seems. With the economy almost touching full employment, it just needs to add about 100,000 jobs on a regular basis to maintain growth levels.
The unemployment rate has declined from 4.4% to 4.3% in May, marking its lowest since 2001. Since January, the unemployment rate has declined 0.5% (read more: 5 Stocks to Buy as Jobless Rate Hits 16-Year Low).
The federal funds rate, in the meanwhile, was raised by a quarter percentage point. They also stuck to their plans of another hike this year and issued forecasts that showed three more quarter point rate increases next year, a definite sign that the policymakers believe that the economy has scope for more strength and stability. Fed Chairwoman Janet Yellen emphasized that the labor market looks quite healthy, justifying Fed’s decision to raise rates (read more: Fed Hikes Rate, Sets Asset Plan: 5 Top Gainers).
Overall, Americans’ general perception of the U.S. economy remained positive last week, with Gallup’s U.S. Economic Confidence Index at +4. The recent confidence levels are well above the largely negative ratings Gallup recorded from 2008 through most of 2016.
There Is No Tech Bubble
Coming back to valuation concerns, Apple Inc. (AAPL - Free Report) , Facebook Inc (FB - Free Report) and other technology giants tanked recently, on worries that their runaway success had made them too expensive. Robert Boroujerdi, a Goldman Sachs Group Inc (GS - Free Report) analyst, said that so-called “FANG” stocks along with Microsoft “have added a total of $600m of market cap this year, or the equivalent gross domestic product of Hong Kong and South Africa combined”.
But, he has forgotten to mention that how much the stock market has evolved in the last 20 years and how tough it is to make a comparison with the dot.com bubble. In other words, tech stocks have recovered only about a quarter of the relative value in the market that they lost during the dot-com crash, which means they have more room to scale higher. Canaccord added that going forward, FANGs will continue to capitalize on “digital advertising, digital video consumption, e-commerce and cloud services” (read more: Is the Tech Rout Overstated? Buy 3 Stocks & ETFs on the Dip).
5 Top Blue Chip Stocks for a Winning Portfolio
Banking on such optimism, there will be a particularly sharp run up in the 120-year-old index of 30 stocks. These companies are slated to gain further in the near term as they have large market capitalization, strong balance sheets and solid cash flow. We have, thus, selected five such blue-chip stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy).
3M Co (MMM - Free Report) operates as a diversified technology company worldwide. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current year earnings increased 3.2% over the last 60 days. The company’s expected growth rate for the current year is 9.5%. 3M has outperformed the Diversified Operations industry in the year-to-date period (+19.4% vs. +4.3%).
Caterpillar Inc. (CAT - Free Report) is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company has a Zacks Rank #1. The Zacks Consensus Estimate for its current year earnings soared 28.3% over the last 60 days. The company’s expected growth rate for the current year is 20.7%. Caterpillar has outshined the Manufacturing - Construction and Mining industry year to date (+16.1% vs. +14.6%). You can see the complete list of today’s Zacks #1 Rank stocks here.
Visa Inc (V - Free Report) is a payments technology company that connects consumers, merchants, financial institutions, businesses, strategic partners and government entities to electronic payments. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current year earnings increased 1.2% over the last 60 days. The company’s expected growth rate for the current year is 18.3%. Visa has outperformed the Financial Transaction Services industry in the year-to-date period (+20.6% vs. +16.6%).
United Technologies Corporation (UTX - Free Report) is engaged in providing high technology products and services to the building systems and aerospace industries around the world. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current year earnings rose 0.3% over the last 60 days. While the company’s expected growth rate for the current year is expected to be positive, it has outperformed the Diversified Operations industry in the year-to-date period (+9.8% vs. +4.3%).
Intel Corporation (INTC - Free Report) is engaged in designing and manufacturing products and technologies, such as the cloud. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current year earnings advanced 2.1% over the last 60 days. The company, which is part of the Semiconductor - General industry, is expected to grow 5.2% this year and has soared 10.9% in the last one-year period.
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