Forget Q3, U.S. Economy Likely to Regain Pace in Q4: 5 Picks

Wall Street has continued its strong recovery rally this month even though the U.S. economy grew just 2% in third-quarter 2021, after rising 6.4% and 6.7%, in the first and second quarter, respectively. The consensus estimate for the third quarter was 2.7%.

Stock market performance is predominantly guided by future expectations and not by the past. The third quarter’s tepid GDP growth (although no way tepid if we consider historical U.S. GDP growth rate) was primarily owing to the rapid spread of the Delta variant of coronavirus, the gradual fading out of the pandemic-led fiscal stimulus, a massive spike in inflation rate due to supply-side bottlenecks and concerns about the Fed’s decision to taper monetary stimulus.

Nevertheless, as we are approaching the end of the first month of the fourth quarter, several of the concerns mentioned above concerns have faded out. A series of economic data released in October reaffirms the strong fundamentals of the U.S. economy.

A strong reduction of news cases of the Delta variant, robust third-quarter earnings results, expectations of sloid holiday season sales and readjustment by businesses with higher inflation this year should pave the way for strong fourth-quarter growth.

U.S. Consumers Regain Confidence in Economy

The Conference Board reported that U.S. consumer confidence index climbed to 113.8 in October from 109.8 in September, beating the consensus estimate of 107.5. The index rebounded after three consecutive months of decline.

More importantly, the expectations sub-index (consumers’ outlook for income, business, and labor market conditions for the next 6 months) improved to 91.3 in October from 86.7 in September. A sharp reduction of new coronavirus cases, strong economic data and the gradual improvement in the labor market are the primary reasons for the index’s northbound move.

The weekly jobless claims stayed at the low-end of the pandemic era over the last three months. Initial jobless claims fell below 300,000 in the last three reported weeks. This is the best level since Mar 14, 2020, just before the COVID-19 outbreak in the United States.

Businesses Continue Expansion

The Institute of Supply Management reported that both manufacturing and services PMIs showed exceptional results in September. Robust data for both manufacturing and services sectors will eventually lead to strong economic growth. Notably, the services sector accounts for 70% of the U.S. GDP while the manufacturing sector commands around 12% of economic activities.

Moreover, new orders for core capital goods (non-defense capital goods excluding aircraft) rose 0.8% in September to an all-time high. This metric is a closely watched proxy for a business investment plan. Shipments of core capital goods rose 1.4% in September. This metric is used to calculate equipment spending in GDP measurement.

Expectations of Strong Holiday Sales

Retail sales in September rose 0.7% in contrast to the consensus estimate of a decline of 0.1%. Year over year, retail sales climbed 13.9% in September. Core retail (excluding auto) sales in September rose 0.8%, beating the consensus estimate of 0.5%. ear over year, core retail sales jumped 15.6% in September.

Retail sales rose steadily despite the termination of the weekly unemployment benefit on Sep 6. Consumer spending is likely to remain elevated as we are entering the holiday sales season. Holiday retail sales are likely to climb this year as projected by various major market researchers like Deloitte, Mastercard SpendingPulse, Bain and KPMG. Notably, consumer spending accounts for nearly 70% of U.S. GDP.

Wall Street Likely to Fly High

Wall Street regained its impressive momentum in October after a tumultuous September. Month to date, the Dow, the S&P 500 and the Nasdaq Composite, have rallied 5.6%, 6.7% and 6.9%, respectively. This performance is commendable as October is also known for its historically volatile trading pattern. In September, the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — plummeted 4.3%, 4.8% and 5.3%, respectively.

Market valuation has already discounted the likelihood of the Fed starting to taper its monthly bond-buy program this year. The current projection by the CME FedWatch shows 7% probability that the central bank will hike the benchmark interest rate in early 2022. The Fed has maintained that rate hike is unlikely before the second half of 2022.

Finally, robust U.S. corporate earnings in the first and second and third quarters have bolstered market participants’ confidence in U.S. equities. All three major stock indexes posted record-highs in October. Year to date, the Dow, the S&P 500 and the Nasdaq Composite have rallied 16.7%, 22.4% and 19.9%, respectively.

Our Top Picks

Several good stocks are available for investment for the rest of this year. However, we have applied our VGM Style Score to narrow down the search to five stocks. These stocks have strong growth potential for the rest of 2021 and have seen solid earnings estimate revisions within the past 7 days, indicating that the market currently expects these companies to do solid business in 2021.

Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price perfprmance of our five picks in the past month.

Zacks Investment Research

Image Source: Zacks Investment Research

Nucor Corp. NUE is a leading producer of structural steel, steel bars, steel joists, steel deck and cold-finished bars in the United States. It operates through three segments: Steel Mills, Steel Products, and Raw Materials.

The company has been seeing consistent momentum in the non-residential construction market. Demand in non-residential construction markets was strong in the most recent quarter. Nucor’s downstream products unit has been benefiting from continued strength in the non-residential construction markets.
This Zacks Rank #1 company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved 1.7% over the last 7 days.

United Parcel Service Inc. UPS is the world’s largest express carrier and package delivery company. It has been benefited by high package delivery demand. Robust improvement in all products is likely to have driven revenues at the U.S. Domestic Package segment. Strong demand in Europe is likely to have aided the International Package unit.

UPS disclosed its intention to be carbon neutral across scope 1, 2 and 3 emissions in its global operations by 2050. Moreover, the company aims to bring about a 50% reduction in carbon dioxide per package delivered for its global small package operations It also aims to ensure that by 2035 all its facilities are powered by renewable electricity.

This Zacks Rank #2 company has an expected earnings growth rate of 39% for the current year. The Zacks Consensus Estimate for current-year earnings improved 2% over the last 7 days.

Valero Energy Corp. VLO is the largest independent refiner and marketer of petroleum products in the United States. Among all the independent refiners, Valero offers the most diversified refinery base with a capacity of 3.1 million barrels per day in its 15 refineries located throughout the United States, Canada and the Caribbean.

The majority of the company’s refining plants are situated in the Gulf coast area from where there is easy access to the export facilities. The company is poised to benefit from the new standard set by the International Maritime Organization.

This Zacks Rank #2 company has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved more than 100% over the last 7 days.

General Dynamics Corp. GD is engaged in mission-critical information systems and technologies, land and expeditionary combat vehicles, armaments and munitions, shipbuilding and marine systems, and business aviation.

General Dynamics appears to be on track for the entry of the G700 jet into service in the fourth quarter of 2022. Its impressive backlog trends indicate solid demand for the company’s products, thereby bolstering its revenue generation prospects significantly.

This Zacks Rank #2 company has an expected earnings growth rate of 4.8% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.3% over the last 7 days.

AutoZone Inc. AZO is one of the leading specialty retailers and distributor of automotive replacement parts and accessories in the United States. It operates in the Do-It-Yourself retail, Do-It-for-Me auto parts and products markets.

AutoZone’s high-quality products, store-expansion initiatives and omni-channel efforts to improve customer shopping experience are boosting its market share. The ramp up of e-commerce efforts including ship-to-home next day, buy online, pick-up in stores and commercial customer ordering are aiding AutoZone’s top-line growth. The solid reputation of the Duralast brand, competitive pricing and greater engagement from store-operating teams are supporting its growth.

This Zacks Rank #2 company has an expected earnings growth rate of 2.5% for the current year (ending August 2022). The Zacks Consensus Estimate for current-year earnings improved 0.9% over the last 7 days.

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