Anxiety about the spread of the novel coronavirus has injected bouts of volatility in Wall Street, with the Dow on verge of seeing the worst week in its 124-year history. And the U.S. economy is expected to contract in the wake of European travel ban, suspension of professional sporting activities and shutdown in some places in New York. Needless to say, the deadly virus is expected to weigh on corporate profits and disrupt supply chains across the world. Particularly, airlines are expected to face their worst year in terms of revenues, amid massive restrictions and fears.
But to help the U.S. economy, especially, to bear the coronavirus carnage without too much damage, the Fed is widely expected to take aggressive monetary measures. Many economists now see the Fed trimming benchmark interest rates to zero percent as quickly as possible. Michael Feroli, chief U.S. economist at JPMorgan Chase, also expects the Fed to cut rates to zero in the near term.
The CME Group's FedWatch tool, by the way, suggests that investors are now pricing in at least a 67% chance of a 75-basis point rate cut next week, a move that would lower the Fed’s target rate to a range of 0.25-1%.
Last week, in a rare inter-meeting move, the Fed trimmed its benchmark interest rate by half a percentage point to a range of 1-1.25%. In fact, the last time the Fed cut rates on an emergency basis was in the December 2008 financial crisis. The rate cut aims at thwarting the coronavirus threat to the economy by lowering borrowing costs. Also, the Fed has vowed to pump trillions into the financial system, which certainly bodes well for the broader stock market.
Stocks to Gain From a Rate Cut
As coronavirus spurs bets for more rate cuts by the Fed, shares of rate-sensitive real estate and utilities will certainly climb. Rate cuts are a boon to real estate activities. After all, lower interest rates will bring down borrowing costs for projects, which will significantly help companies predominantly involved in the construction business.
Utilities, in the meanwhile, are capital-intensive businesses and the funds generated from internal sources are not always sufficient to meet requirements. Consequently, these companies have high levels of debt. Thus, low interest rates will help pay off debts and book profits.
If we look at others sectors, healthcare stocks generally outperform after a rate cut. This is because healthcare stocks are known for paying hefty dividends, which makes them more alluring when rates decline in uneasy economic conditions. In fact, lower interest rates mostly tend to lift prices of high-yielding stocks.
Top 5 Picks
We have, thus, selected five solid stocks from the aforesaid sectors that are poised to gain from the rate cut. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy).
PulteGroup, Inc. ( PHM - Free Report) has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has climbed 6.4% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 18.6% and 18.3%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here . D.R. Horton, Inc. ( DHI - Free Report) has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has jumped 7.3% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 21.5% and 22.8%, respectively. Sempra Energy ( SRE - Free Report) develops and operates energy infrastructure. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has risen 3.2% over the past 60 days. The company’s expected earnings growth rate for the next quarter and current year is 12.7% and 5.2%, respectively. Atmos Energy Corporation ( ATO - Free Report) engages in the regulated natural gas distribution, and pipeline and storage businesses. The company has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved up 0.6% over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 6.6% and 8.1%, respectively. AmerisourceBergen Corporation ( ABC - Free Report) , known for distributing pharmaceutical products, has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has moved 2.9% up over the past 60 days. The company’s expected earnings growth rate for the current quarter and year is 8.1% and 8.5%, respectively. Zacks Top 10 Stocks for 2020
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