Will the bull market continue after a year of double-digit gains and low volatility? Market pundits believe the broader markets will push further into the record territory in 2018. Long-awaited tax cuts, which are likely to be passed as early as this week, are expected to provide a shot in the arm to this aging bull market.
Big banks are poised to gain enormously as they have been paying heavy taxes. Lower tax rates will also drive after-tax earnings for tech behemoths as it leads to repatriation of trillions of dollars held abroad by such companies. Tech companies can use this extra cash for research and development as well as mergers and acquisitions. Thus, investors should focus on big financial and technology service providers that can make the most of the slashed corporate tax rate.
How Did the Major Bourses Do?
The Dow Jones posted its 70th record close of the year, marking the highest number of record closes in a calendar year. The Dow also notched its seventh positive trading session in the past eight. The sheer number of Dow’s record closes reflects the ease with which the market is scaling higher. The blue-chip index is also inching closer to the 25,000 milestone after having crossed the 20,000, 21,000, 22,000, 23,000 and 24,000 levels this year.
The S&P 500 also maintained its upward journey for 13 straight months through November. The benchmark index, in fact, hasn’t seen a drop of at least 3% since Nov 7, 2016, the longest stretch on record. The index had rallied 20% so far this year and is on track to record its best year since 2013, when it had surged 29.6%.
The Nasdaq, in the meanwhile, topped the 7,000 mark for the first time in history. So far this year, the tech-laden index is up 30%, largely driven by mega-cap technology and Internet stocks. Some hot tech stocks like Facebook, Amazon, Netflix and Google rallied more than 30% in the same time frame.
Market volatility isn’t roaring back either, with 2017 being the calmest for stocks since 1964. The so-called “fear gauge”, CBOE Volatility Index traded at 9.29, substantially lower than its long-term average of 20.
What’s Driving the Markets?
Anticipation of the passage of the tax bill by Republican congressional leaders is primarily responsible for propelling the major indices to record highs. Treasury Secretary Steven Mnuchin said that he has “no doubt” that the GOP will pass its tax bill this week.
Senators Bob Corker of Tennessee and Marco Rubio of Florida have also pledged their support for the tax reform. Senator John McCain of Arizona’s absence won’t matter either as there is a 52-48 Senate Republican majority. McCain is expected to miss the vote since he will be going back to his home state for some physical therapy.
Biggest Beneficiaries of a Corporate Tax Cut
The tax bill will be a big boost for Corporate America as it will slash the corporate tax rate from 35% to 21%. Banks face a high tax burden, which makes them big gainers when tax rates go down. As per KBW estimates, JPMorgan Chase, Wells Fargo & Co and Bank of America Corp will enjoy a 20% or more hike in profits if the corporate tax rate is cut to 20%.
Corporates would also be charged a one-time low tax rate of 15% on foreign profits. This helps multinationals including large tech majors to bring funds held overseas back to the United States at a lower tax rate. Bringing back massive overseas cash pile will help tech companies carry out a combination of share buybacks, pay dividends and M&A activities.
Let us not forget that tech behemoths like Apple, Alphabet, Microsoft, Cisco Systems and Oracle hold 88% of their money overseas to avoid paying the 35% corporate tax rate on earnings. Thus, they are positioned to gain immensely under Trump’s tax reduction plan.
5 Top Winners
Given the positives, investors should double down on the hottest banking and tech bigwigs. We have, therefore, selected five companies that flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Eagle Bancorp, Inc. (EGBN - Free Report) is a bank holding company for EagleBank (the Bank). The bank offers a range of retail banking services. It also offers online banking, mobile banking and remote deposit services. The stock has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings rose 1.2% over the last 60 days. Eagle Bancorp’s projected growth rate for the current year is 16.8%, better than the industry’s projected gain of 10%. The company is set to grow earnings by 9.1% in 2018.
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First Bancorp (FBNC - Free Report) is the bank holding company for First Bank (the Bank). It engages in a range of banking activities, including the acceptance of deposits and the making of loans. The stock has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings advanced 9.7% in the last 60 days. First Bancorp’s expected growth rate for the current year is 52.3%, way higher than the industry’s estimated rally of 7%. Also, the company is expected to witness earnings growth of 16.9% next year.
NetApp Inc. (NTAP - Free Report) provides software, systems and services to manage and store customer data. The company sports a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has risen 6.8% in the last 60 days.
NetApp’s expected growth rate for the current year is 21.1%, while the industry is poised to deliver a flat return. Additionally, the stock is anticipated to see 8.5% increase in earnings next year. You can see the complete list of today’s Zacks #1 Rank stocks here.
DXC Technology Company DXC – a Zacks Rank #1 company – provides information technology services and solutions. The Zacks Consensus Estimate for its current-year earnings climbed 8.9% over the last 60 days. DXC Technology’s projected growth rate for the current year is 140.2%, way higher than the industry’s projected gain of 4.9%. The company's earnings are also set to grow 15.9% in 2018.
Callidus Software Inc. is a provider of cloud-based sales, marketing, learning and customer experience solutions. The stock has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings advanced 6.3% in the last 60 days. Callidus Software’s expected growth rate for the current year is 21.8%, higher than the industry’s estimated rally of 9.6%. The stock is expected to grow earnings by 47.6% next year.
Zacks Editor-in-Chief Goes ""All In"" on This Stock
Full disclosure, Kevin Matras now has more of his own money in one particular stock than in any other. He believes in its short-term profit potential and also in its prospects to more than double by 2019. Today he reveals and explains his surprising move in a new Special Report.
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