After a spell of high volatility driven by uncertainty over global trade policy and the threat of rise in prices of essential commodities, Wall Street is looking for some respite in the upcoming earnings season. Q1 is expected to be one of the strongest in years, both in terms of earnings and revenues. Such solid quarterly profits could provide support to the markets.
Earnings expectations are rising of late mostly due to the recently-passed tax reform bill that sharply trims corporate tax rates. Upbeat economic scenario both at home and abroad is also one of the primary factors that will help earnings pick up pace.
Given the positive trend, investing in blue-chip stocks that are likely to make the most of the earnings season seems judicious. But, why blue chips? This is because such stocks are positioned to report impressive earnings results as they mostly have a strong balance sheet and solid cash flow.
Q1 Earnings Growth Expected to be Stronger
Blue chips are expected to soar high as this earnings season unfolds. Total earnings among all sectors are estimated to improve 16% from the same period last year on 7.4% higher revenues. Such an uptick will follow 13.5% earnings growth on 8.5% revenue improvement last quarter, marking the best quarterly performance in more than six years (read more: Q1 Earnings to Take Wall Street by Storm: Top 6 Picks).
The gains are likely to be broad-based, with nearly all the sectors expected to report year-over-year earnings growth, except for autos and conglomerates. The energy sector is poised to report highest earnings growth among all sectors. Materials, construction, industrial products, technology, financials, retail/wholesale, and medical to name a few are expected to contribute significantly.
Catalysts Behind the Strong Expectations
The recent tax code overhaul and a strengthening economy could certainly help blue-chip companies make more money this upcoming earnings season.
Republican-Backed Tax Package
Republicans efficaciously defied opposition from Democrats to pass the biggest overhaul of the U.S. tax code that trimmed corporate taxes from 35% to 21%. 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.
Strong Economic Growth
Economic recovery is also likely to give a boost to profitability of American blue-chip companies. Trump’s economy is in the pink of health, with the unemployment rate remaining at a 17-year low of 4.1% in March, while workers’ hourly wages rose 8 cents, or 0.3%, to $26.82 in the month.
The United States at the same time added an average of 202,000 jobs a month in Q1, faster than the average gains in the same period of 2017 and 2016. U.S. consumer sentiment in March reached its highest level since 2004, courtesy of a healthy job market.
The global economy too is estimated to expand at a rate of 3.1% year over year in 2018. This comes on top of a promising 3% growth rate in 2017, per the World Bank.
4 Blue Chips to Buy Heading into Earnings Season
Blue chips are poised for a strong earnings season, mostly in response to the corporate tax cut policy and robust economic growth both at home and abroad.
This calls for investing in some fundamentally sound blue-chip companies which can make the most of the earnings season. We have, thus, zeroed in on four such stocks that flaunt a Zacks Rank #2 (Buy).
The Travelers Companies, Inc. (TRV - Free Report) provides a range of commercial and personal property, and casualty insurance products and services to businesses, government units, associations, and individuals. Considering a more comprehensive earnings history, Travelers Companies has an average four-quarter positive earnings surprise of 43.1%. Companies with such positive earnings surprise are more likely to positively surprise in the near future.
The Zacks Consensus Estimate for its current-year earnings rose 4.5% in the last 60 days. If this wasn’t enough, the company has an Earnings ESP of +2.00%. A positive Earnings ESP with a Zacks Rank 2 has resulted in positive earnings surprises 70% of the times over the past decade. The company is expected to report earnings results for the quarter ending March on Apr 24.
Visa Inc. (V - Free Report) operates as a payments technology company that connects consumers, businesses, banks, and governments enabling them to use digital currency instead of cash and checks. Bearing in mind a more inclusive earnings history, Visa has an average four-quarter positive earnings surprise of 8.1%.
The Zacks Consensus Estimate for its current-year earnings climbed 7.6% in the last 90 days. Visa has an Earnings ESP of +0.25%. The company is scheduled to report earnings results for the quarter ending March on Apr 25.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Johnson & Johnson (JNJ - Free Report) , together with its subsidiaries, researches and develops, manufactures, and sells various products in the health care field. Looking at a more comprehensive earnings history, Johnson & Johnson has an average four-quarter positive earnings surprise of 3.1%.
The Zacks Consensus Estimate for its current-year earnings also rose 3.4% in the last 90 days. Johnson & Johnson has an Earnings ESP of +1.16%. The company is slated to report earnings results for the quarter ending March on Apr 17.
Cisco Systems, Inc. (CSCO - Free Report) designs, manufactures, and sells Internet Protocol (IP) based networking and other products related to the communications and information technology industry. Considering a more comprehensive earnings history, Cisco Systems has an average four-quarter positive earnings surprise of almost 3%.
The Zacks Consensus Estimate for its current-year earnings went up 4.5% in the last 90 days. Cisco Systems has an Earnings ESP of -0.26%. But, even a negative Earnings ESP coupled with a Zacks Rank 2 has produced positive earnings surprises 52% of the times in the last 10 years. The company is scheduled to report earnings results for the quarter ending April on May 16.
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