U.S. stock markets have rallied year to date. after wrapping up 2022 as the worst year since 2008, terminating a three-year winning streak. Major stock indexes suffered a huge blow last year. However, the Dow suffered the least.
Dow Changes Course in 2023
In 2022, the Dow fell 8.8% year over year, while the S&P 500 and the Nasdaq Composite plummeted 19.4% and 33.1%, respectively. Last year, the Fed raised the benchmark interest rate by 4.25% to combat 40-year high inflation.
A higher interest rate is detrimental to growth stocks like consumer discretionary and technology. In contrast to the Nasdaq Composite and the S&P 500 indexes, the 30-stock Dow is more inclined to cyclical stocks than growth stocks. Therefore, the index suffered the least. However, the situation has taken a turn in 2023.
Dow Lags Peers Year to Date
Less-than-expected inflation rates in October, November and December with respect to several measures have clearly indicated this. On Jan 31, the Department of Labor reported that the employment cost index for fourth-quarter 2022 rose 1%, below the consensus mark of a 1.2% rise. The metric for third-quarter 2022 was also 1.2%. The data clearly indicates that wage rate, a major source of current inflation is declining as expected by the Fed.
On Feb 1, in its February FOMC meeting, the Fed hiked the benchmark interest rate by 25 basis points to the range of 4.50% to 4.75%, marking its highest rate since late 2007. Market participants are expecting two more rate hike of 25 basis points each in 2023.
The technology sector is no longer overvalued. We are seeing early signs of market participants’ confidence returning to this sector. Of the three major stock indexes — year to date — The S&P 500 and the Nasdaq Composite advanced 7.8% and 13.6%, respectively. The Dow gained just 3.3%.
U.S. Economy is Cooling
The U.S. economy expanded 2.9% in fourth-quarter 2022. Although the metric exceeded the consensus mark of 2.6%, it declined from the third-quarter’s growth rate of 3.2%. The latest projection by the Atlanta Fed revealed that the U.S. economy may have expanded by 2.2% in first-quarter 2023.
A devastated housing market owing to the high mortgage rate, disappointing retail sales in December, the peak festive season, huge inventory accumulation by several retailers, a sharp fall in U.S. manufacturing activities and a notable decline in factory orders and industrial production indicated that the U.S. economy is cooling in the direction desired by the Fed.
Moreover, several U.S. corporate behemoths have already retrenched manpower to a good extent at high levels. Lack of earnings visibility due to some near-term concerns related to business opportunities is the primary reasons for recent job cuts.
Market participants are expecting more softness in consumer spending and a decline in business spending due to a margin squeeze resulting in moderate GDP growth. Powell also warned of some toughness going forward. As a result, growth and momentum stocks may underperform cyclical value stocks in 2023.
Our Top Picks
We have narrowed our search to five blue-chip (components of Dow) stocks with strong potential for 2023. These stocks have seen positive earnings estimate revisions in the last 60 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our five picks in the past three months.
Image Source: Zacks Investment Research
The Coca-Cola Co. KO has benefited from its strategic transformation and ongoing recovery around the world. Strength across the majority of markets, investments in marketplace, recovery in certain markets as well as the cycling of last year’s pandemic-led impacts aided volumes. KO is poised to gain from innovations and accelerating digital investments.
Coca-Cola has an expected revenue and earnings growth rate of 3.2% and 2.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.8% over the last 60 days.
Caterpillar Inc.’s CAT revenues and earnings grew year over year for six straight quarters thanks to its cost-saving actions, strong end-market demand and pricing actions that offset the impact of the ongoing supply-chain snarls and cost pressures. The Construction Industries space is expected to benefit from rising construction activities in the United States and other parts of the world.
Backed by demand for commodities fueled by the energy-transition trend, a thriving mining sector will aid the Resource Industries segment. CAT’s dividend yield and payout ratio are higher than its peers. A strong liquidity position and investments in expanding services are other positives.
Caterpillar has an expected revenue and earnings growth rate of 6.8% and 12.4%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last 30 days.
salesforce.com inc. CRM is benefiting from a robust demand environment as customers are undergoing a major digital transformation. The rapid adoption of its cloud-based solutions is driving demand for CRM’s products. CRM’s sustained focus on introducing more aligned products as per customer needs is driving its top line.
Continued deal wins in the international market are the other growth drivers. The acquisition of Slack would position salesforce.com as a leader in the enterprise team collaboration solution space and help it compete better with Microsoft’s Teams product. We expect CRM revenues to witness a CAGR of 12.5% during fiscal 2023-2025.
salesforce.com has an expected revenue and earnings growth rate of 10.9% and 18.2%, respectively, for the current year (January 2024). The Zacks Consensus Estimate for current-year earnings has improved 1.2% over the last 30 days.
The Procter & Gamble Co. PG has benefitted from robust pricing and a favorable mix, along with strength across segments. PG’s products play a key role in meeting the daily health, hygiene and cleaning needs of consumers around the world. PG witnessed continued strong momentum as reflected by underlying strength in brands and appropriate strategies, which aided its organic sales growth.
Procter & Gamble remains focused on productivity and cost-saving plans to boost margins. Its continued investment in business alongside efforts to offset macro cost headwinds and balance top and bottom-line growth underscores its productivity efforts. PG is witnessing cost savings and efficiency improvements across all facets of the business.
Procter & Gamble has an expected earnings growth rate of 0.4% and 0.5%, respectively, for the current year (June 2023). The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 30 days.
Visa Inc.’s V numerous buyouts and alliances paved the way for long-term growth and consistently drove its revenues. Constant investments in technology are solidifying V’s position in the payments market. A shift in payments to the digital mode is a boon. Backed by a strong cash position, Visa remains committed to boosting its shareholder value through share buybacks and dividend payments.
Visa has an expected earnings growth rate of 10% and12.4%, respectively, for the current year (September 2023). The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last seven days.
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Visa Inc. (V) : Free Stock Analysis Report
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Procter & Gamble Company (The) (PG) : Free Stock Analysis Report
