U.S. stock markets have rallied year to date. after wrapping up 2022 as the worst year since 2008 and terminating a three-year winning streak. Major stock indexes suffered a huge blow last year. However, the Dow suffered the least.
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 Changes Course in 2023
Several economic data have pointed out that the U.S. economy has been cooling since the beginning of 2023. The inflation rate has dropped to a good extent despite remaining elevated in absolute terms.
Consequently, the Fed reduced the magnitude of interest rate hike in 2023. In his post-FOMC statement in May, Fed Chairman Jerome Powell hinted that the central bank may keep interest rate unchanged at the current 5-5.25% range.
A lower rate hike has enabled growth sector like technology, communication services and consumer discretionary to thrive this year. Consequently, the tech-heavy Nasdaq Composite has jumped 20% year to date. The broad-market S&P 500 Index has also seen a decent rally of 8%. However, the Dow is down 0.3% so far this year.
Our Top Picks
Defying a struggling Dow, we have narrowed our search to four 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 either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks in the past three months.
Image Source: Zacks Investment Research
Caterpillar Inc. CAT has seen year-over-year revenue and earnings growth for nine straight quarters thanks to its cost-saving actions, strong end-market demand and pricing actions that offset the impact of supply chain snarls and cost pressures. We expect the company’s adjusted earnings per share for 2023 to grow 19% and revenues to rise 7%.
The Construction Industries segment of CAT is expected to benefit from the 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. Caterpillar’s dividend yield and payout ratio are higher than its peers. A strong liquidity position, investments in expanding services and digital initiatives should help CAT deliver outsized returns.
Zacks Rank #1 Caterpillar has an expected revenue and earnings growth rate of 9.5% and 27.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 11.8% over the last 30 days.
McDonald's Corp. MCD continues to impress investors with robust comps growth. MCD’s increased focus on menu innovation and loyalty program expansion is commendable. MCD is also undertaking every effort to drive growth in international markets. Robust digitalization is likely to help McDonald's in driving long-term growth and capture market share. MCD plans to open more than 1,900 restaurants globally in 2023.
Zacks Rank #1 McDonald's has an expected revenue and earnings growth rate of 7.7% and 9.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 4.7% over the last 30 days.
Walmart Inc. WMT has been benefiting from its robust omnichannel operations due to its efforts to enhance both store and online experience. WMT has been particularly gaining from its efforts to boost delivery services. WMT’s U.S. comp sales continued gaining from an increased market share in grocery in the fourth quarter of fiscal 2023.
Zacks Rank #2 Walmart has an expected revenue and earnings growth rate of 4% for the current year and earnings growth rate of 10.5% for next year. The Zacks Consensus Estimate for current-year earnings has improved 1.1% over the last seven 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 has witnessed continued strong momentum as reflected by the 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. PG’s continued investment in the business alongside its 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.
Zacks Rank #2 Procter & Gamble has an expected earnings growth rate of 4.5% and 8.2%, respectively, for next fiscal year (June 2024). The Zacks Consensus Estimate for next fiscal year earnings has improved 0.8% over the last 30 days.
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