The euphoria over the Republican-led tax overhaul policy helped the Dow persistently hit record highs and book back-to-back weekly gains. This epic Dow rally is likely to get a boost from a stellar Q4 earnings season. Strong guidance and an upbeat economic scenario are cited to be some of the primary reasons that will help earnings pick up steam.
Given the positives, investing in blue-chip stocks that are likely to make the most of the Q4 earnings season seems judicious. Such stocks, moreover, are positioned to report promising earnings results as they have strong balance sheets and solid cash flow.
Dow Jones to Hit Record High Post Holiday
Dow futures soared triple digits on Jan 15, when the U.S. stock market was closed for Martin Luther King Jr. Day. The Dow has already booked two straight weekly gains, as well as registered seven positive weeks in the last eight. The Dow jumped almost 4.4% and posted its best start to a year since the first nine trading sessions of 2003.
The 30-stock index demonstrated mostly nothing in the way of gyration or market pullbacks. In fact, the broader market shrugged off uncertainty over the past 12 months. The Cboe Volatility Index (VIX), quiet remarkably, registered 47 lowest closings last year, out of a total of 56 since its inception in 1990.
Tax Package: A Boon for Blue Chips
The enthusiasm over tax cuts fueled a strong rally in blue-chip stocks. The corporate tax rate will be lowered from 35% to 21% and will be implemented this year, instead of being delayed till 2019. At the same time, any income brought back from overseas will be taxed 8-15.5%, instead of the current 35%.
A one-time low tax rate on foreign profits will help blue chips bring funds held overseas back to the United States. This will help such companies carry out a combination of share buybacks, dividend payments and M&A activities. They also face a high tax burden, which makes them big gainers when tax rates go down (read more: GOP Passes Landmark Tax Bill: Best & Worst for Stocks).
Q4 Earnings Growth Expected to be Stronger
Such blue-chip stocks’ stupendous start could get even more wings as the Q4 earnings season kicks off. Q4 earnings among all sectors are expected to be up 9.2% from the same period last year on 7% higher revenues. This would follow 6.7% earnings growth recorded in the Q3 of 2017 on 5.9% higher revenues (read more: JPMorgan's Positive Kick-off to Bank Earnings).
Q4 earnings estimates for most of the sectors are expected to be positive, with Energy, Industrial Products, Basic Materials and Technology poised to post strong gains. An uptick in oil and gas output is expected to benefit the energy sector, while an increase in sales from housing demand post-hurricanes will drive manufacturing activities. Tech, in the meanwhile, will make headway from substantial growth in cloud computing, the Internet of Things and artificial intelligence (read more: 5 Best Stocks to Buy Ahead of Q4 Earnings Season).
Healthy Economic Data
A sound economy is further likely to support earnings growth. Wells Fargo & Company (WFC - Free Report) , a diversified financial services company, has predicted that the U.S. economy will expand an average 2.5% each quarter this year and the next.
The unemployment rate, in the meanwhile, is at an ultra-low level of 4.1% and lifted consumer confidence to a 17-year high set in November 2017. Lest we forget, workers’ pay has also increased 2.5% from December 2016 to December 2017, up from 2.4% in the prior month.
Such low jobless level, rise in income and more confident consumers increased spending further at both online and bricks-and-mortar stores and restaurants (read more: Retailers Cap a Robust Holiday-Shopping Season: 5 Must Buys).
4 Blue Chips to Buy Now
Thanks to the bullish factors, there has been a particularly sharp run up in the 120-year-old index of 30 stocks. This calls for investing in some fundamentally sound blue-chip companies which can make the most of the Q4 Earnings season. They have a positive Earnings ESP — our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. We have, thus, zeroed in on four such stocks that also flaunt a Zacks Rank #2 (Buy).
3M Company (MMM - Free Report) operates as a diversified technology company worldwide. The company is expected to report earnings results for the quarter ending December 2017 on Jan 25. 3M has an Earnings ESP of +4.37%. The stock’s expected earnings growth rate for the current year is 11.5%, better than the industry’s expected gain of 8%.
Caterpillar Inc. (CAT - Free Report) manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. The company is expected to report earnings results for the quarter ending December 2017 on Jan 25. Caterpillar has an Earnings ESP of +6.11%. The stock’s expected earnings growth rate for the current year is 88.9%, better than the industry’s expected gain of 34%.
McDonald's Corporation (MCD - Free Report) operates and franchises McDonald's restaurants in the United States and internationally. The company is expected to report earnings results for the quarter ending December 2017 on Jan 30. McDonald's has an Earnings ESP of +0.11%. The stock’s expected earnings growth rate for the current year is 14.6%, better than the industry’s projected gain of 1.2%.
The Procter & Gamble Company (PG - Free Report) provides branded consumer packaged goods to consumers in the United States and internationally. The company is expected to report earnings results for the quarter ending December 2017 on Jan 23. Procter & Gamble has an Earnings ESP of +0.87%. The stock, which is part of the Zacks Soap and Cleaning Materials industry, is expected to post a solid earnings growth rate of 6.9% in the current year.
Today's Stocks from Zacks' Hottest Strategies
It's hard to believe, even for us at Zacks. But while the market gained +18.8% from 2016 - Q1 2017, our top stock-picking screens have returned +157.0%, +128.0%, +97.8%, +94.7%, and +90.2% respectively.
And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - Q1 2017, the composite yearly average gain for these strategies has beaten the market more than 11X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.
See Them Free>>