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Q3 Earnings of S&P 500 Companies Cross 7-Year Peak: 5 Picks

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Corporate America is performing extremely well with respect to earnings results in 2018. Despite severe volatility plaguing the U.S. stock markets in 2018, especially in October and November so far, earnings results have been painting a different picture. In fact, they indicate that U.S. businesses are on a solid footing despite global trade war concerns.

As of Nov 16, 92.8% of the benchmark S&P 500 index’s members have reported their earnings results for the third quarter of 2018. Overall earnings growth in third quarter has already surpassed earnings growth in the second quarter, which was the highest in seven years. At this stage, it will be prudent to invest in S&P 500 stocks with a favorable Zacks Rank and strong growth potential.

Strong Third-Quarter Earnings Results

As of Nov 16, 464 S&P 500 members have reported third-quarter earnings results. Total earnings for these 464 companies are up 25.7% from the same period last year on 8.4% higher revenues. In the first quarter, total earnings of S&P 500 companies were up 24.7% on 8.7% higher revenues. In the second quarter, total earnings of S&P 500 were up 25.4% on 8.7% higher revenues.

Moreover, in the third quarter, 78.7% of the companies which have reported results outpaced the Zacks Consensus Estimate for earnings and 64% surpassed the same estimate for revenues. Also, 53.7% of the companies beat both earnings and revenues estimates. (Read More: Pullback in Retail Stocks Reflects Elevated Expectations)

Is This Peak Corporate Earnings?

Despite above-mentioned positives some weak signs have also appeared which prompted some analysts to predict that corporate America has reached its peak earnings momentum. Estimates for the fourth-quarter 2018 have come down to 13.7% from 15.9% at the start of the period.

Several bellwether companies have provided weak earnings and revenues guidance for the fourth quarter primarily due to adverse movement of foreign exchange rate (a strong U.S. dollar), cost push inflation (high input prices due to imposition of tariffs) and an impending global economic slowdown.

Our Top Pick

Despite some short-term fluctuations, earnings momentum will persist in the long term buoyed by healthy fundamentals of the U.S. economy. Consequently, it will be a prudent move to invest in S&P 500 stocks which have performed in the third quarter of 2018. However, picking winning stocks can be a difficult task.

This is where our VGM Score comes in handy. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select the winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.

We have narrowed down our search to the following stocks, each of which has a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of A or B.

The chart below shows price performance of our five picks year to date.

Intel Corp. (INTC - Free Report) is the largest global semiconductor chip set manufacturer for PC and notebook. It has a Zacks Rank #1 and a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here. Intel generated positive earnings surprise of 21.7% in the third quarter. The company has expected earnings growth of 30.9% for current year. The Zacks Consensus Estimate for the current year has improved by 9.7% over the last 60 days.

E*TRADE Financial Corp. (ETFC - Free Report) is a financial services company and an online brokerage firm. It has a Zacks Rank #1 and a VGM Score of B. E*TRADE generated positive earnings surprise of 20.5% in the third quarter. The company has expected earnings growth of 75.8% for current year. The Zacks Consensus Estimate for the current year has improved by 6.9% over the last 60 days.

Macy's Inc. (M - Free Report) is one of the leading retailers of the United States. It has a Zacks Rank #2 and a VGM Score of B. Macy’s generated positive earnings surprise of 92.9% in the third quarter. The company has expected earnings growth of 10.9% for current year. The Zacks Consensus Estimate for the current year has improved by 4% over the last 60 days.

The Progressive Corp. (PGR - Free Report) provides personal and commercial property-casualty insurance, and other specialty property-casualty insurance and related services primarily in the United States. It has a Zacks Rank #2 and a VGM Score of A. The Progressive generated positive earnings surprise of 37.7% in the third quarter. The company has expected earnings growth of 80.2% for current year. The Zacks Consensus Estimate for the current year has improved by 3% over the last 60 days.

Apache Corp. (APA - Free Report) is an independent energy company that explores for, develops and produces natural gas, crude oil and natural gas liquids. It has a Zacks Rank #2 and a VGM Score of A. Apache generated positive earnings surprise of 46.5% in the third quarter. The company has expected earnings growth of 737.5% for current year. The Zacks Consensus Estimate for the current year has improved by 18.9% over the last 60 days.

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