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Fed's July Rate Hike and Comments Match Expectations: 5 Picks
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On Jul 26, the Fed raised the benchmark lending rate by 25 basis points to the range of 5.25-5.5%. This marked the highest range of the Fed fund rate since March 2001. Notably, since March 2022, the central bank hiked its interest rate in 10 consecutive FOMC meetings before giving a pause in the June 2023 meeting. It again reinitiated the rate hiking regime as the inflation rate remained elevated, at almost double the Fed’s 2% target rate.
In his post-FOMC statement, Fed Chairman Jerome Powell said "The process of getting inflation back down to 2% has a long way to go." Powell also accepted the fact that the aggregate price level has moderated steadily since June 2022.
According to Powell, “I would say it’s certainly possible that we will raise funds again at the September meeting if the data warranted. And I would also say it’s possible that we would choose to hold steady and we’re going to be making careful assessments, as I said, meeting by meeting. The FOMC will be assessing the totality of the incoming data” and its implications for economic activity and inflation.
Importantly, a 25-basis point rise in interest rate was fully priced in market valuations. Moreover, the Fed Chairman did not surprise either in positive or negative direction with his comment. Consequently, Wall Street did not react overwhelmingly. The Dow rose 0.2%, the Nasdaq Composite fell 0.1% and the S&P 500 remained almost flat.
Stock Selection Process
At his stage, we have adopted three stock selection criteria that will strengthen investor’s portfolio. First, select those stocks that have released impressive second-quarter 2023 earnings results with solid guidance. Second, select stocks with a favorable Zacks Rank. The combination of a favorable Zacks Rank and earnings beat will drive stock prices in the near future. Third, select corporate giants (market capital > 100 billion) as these companies enjoy a robust business model, globally acclaimed brand recognition and strong financial position.
The chart below shows the price performance of our five picks year to date.
Image Source: Zacks Investment Research
Meta Platforms Inc. (META - Free Report) announced quarterly earnings of $3.23 per share, surpassing the Zacks Consensus Estimate of $2.87. META posted revenues of $32 billion, beating the Zacks Consensus Estimate by 3.51%. META guided that its revenue will be in the range of $32 - $34.5 billion for the current quarter, more than the Zacks Consensus Estimate of $31.34 billion.
META is benefiting from steady user growth across all regions, particularly Asia Pacific. Increased engagement for its products like Instagram, WhatsApp, Messenger, and Facebook has been a major growth driver.
Meta Platform has an expected revenue and earnings growth rate of 9.4% and 22.3%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last seven days.
PepsiCo Inc. (PEP - Free Report) reported robust second-quarter core EPS of $2.09, beating the Zacks Consensus Estimate of $1.95. Net revenues of $22,322 million improved 10.4% year over year and surpassed the Zacks Consensus Estimate of $21,609 million. Revenues benefited from a robust price/mix in the reported quarter.
PEP expects organic revenue growth of 10% for 2023 compared with the 8% rise estimated earlier. PEP expects core earnings per share of $7.47 for 2023 compared with the $7.27 forecast earlier.
PepsiCo has an expected revenue and earnings growth rate of 6.4% and 9.9%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 2.2% over the last 30 days.
Johnson & Johnson (JNJ - Free Report) reported quarterly earnings of $2.80 per share, which outpaced the Zacks Consensus Estimate of $2.61. Sales came in at $25.53 billion, beating the Zacks Consensus Estimate of $24.68 billion.
JNJ raised its revenue guidance to a range of $98.8 billion to $99.8 billion from $97.9 billion to $98.9 billion. This guidance excludes any revenues from its COVID-19 vaccine. JNJ’s adjusted earnings per share guidance was raised from a range of $10.60-$10.70 to $10.70 -$10.80.
Johnson & Johnson has an expected revenue and earnings growth rate of 5.3% and 5.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.8% over the last seven days.
Alphabet Inc. (GOOGL - Free Report) reported earnings of $1.44 per share, beating the Zacks Consensus Estimate by 9.1%. Net revenues, excluding total traffic acquisition costs or TAC (the portion of revenues shared with Google’s partners and amounts paid to distribution partners and others who direct traffic to the Google website), was $62.07 billion, which surpassed the consensus mark of $60.24 billion.
Top-line growth was driven by the solid momentum in GOOGL’s cloud business and improvements in Search and YouTube’s performance. Strength in the Other Bets segment also acted as a catalyst.
Alphabet has an expected revenue and earnings growth rate of 6.2% and 18.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.9% over the last 90 days.
Intuitive Surgical Inc. (ISRG - Free Report) reported quarterly adjusted earnings per share of $1.42, beating the Zacks Consensus Estimate of $1.32. The company reported revenues of $1.76 billion, outpacing the Zacks Consensus Estimate by 1.4%.
ISRG witnessed continued growth in its da Vinci procedure volume. Although COVID-19 cases adversely impacted its procedure volume in China during the quarter, the country plans to add 559 robotic systems in the coming years. ISRG will provide some of these systems, mostly between 2024 and 2027. This will drive its top-line growth significantly.
Intuitive Surgical has an expected revenue and earnings growth rate of 14.5% and 18.8%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.6% over the last seven days.
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Fed's July Rate Hike and Comments Match Expectations: 5 Picks
On Jul 26, the Fed raised the benchmark lending rate by 25 basis points to the range of 5.25-5.5%. This marked the highest range of the Fed fund rate since March 2001. Notably, since March 2022, the central bank hiked its interest rate in 10 consecutive FOMC meetings before giving a pause in the June 2023 meeting. It again reinitiated the rate hiking regime as the inflation rate remained elevated, at almost double the Fed’s 2% target rate.
In his post-FOMC statement, Fed Chairman Jerome Powell said "The process of getting inflation back down to 2% has a long way to go." Powell also accepted the fact that the aggregate price level has moderated steadily since June 2022.
According to Powell, “I would say it’s certainly possible that we will raise funds again at the September meeting if the data warranted. And I would also say it’s possible that we would choose to hold steady and we’re going to be making careful assessments, as I said, meeting by meeting. The FOMC will be assessing the totality of the incoming data” and its implications for economic activity and inflation.
Importantly, a 25-basis point rise in interest rate was fully priced in market valuations. Moreover, the Fed Chairman did not surprise either in positive or negative direction with his comment. Consequently, Wall Street did not react overwhelmingly. The Dow rose 0.2%, the Nasdaq Composite fell 0.1% and the S&P 500 remained almost flat.
Stock Selection Process
At his stage, we have adopted three stock selection criteria that will strengthen investor’s portfolio. First, select those stocks that have released impressive second-quarter 2023 earnings results with solid guidance. Second, select stocks with a favorable Zacks Rank. The combination of a favorable Zacks Rank and earnings beat will drive stock prices in the near future. Third, select corporate giants (market capital > 100 billion) as these companies enjoy a robust business model, globally acclaimed brand recognition and strong financial position.
Our Top Picks
Based on the above-mentioned criteria, we have narrowed our search to five U.S. corporate behemoths. 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 year to date.
Image Source: Zacks Investment Research
Meta Platforms Inc. (META - Free Report) announced quarterly earnings of $3.23 per share, surpassing the Zacks Consensus Estimate of $2.87. META posted revenues of $32 billion, beating the Zacks Consensus Estimate by 3.51%. META guided that its revenue will be in the range of $32 - $34.5 billion for the current quarter, more than the Zacks Consensus Estimate of $31.34 billion.
META is benefiting from steady user growth across all regions, particularly Asia Pacific. Increased engagement for its products like Instagram, WhatsApp, Messenger, and Facebook has been a major growth driver.
Meta Platform has an expected revenue and earnings growth rate of 9.4% and 22.3%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last seven days.
PepsiCo Inc. (PEP - Free Report) reported robust second-quarter core EPS of $2.09, beating the Zacks Consensus Estimate of $1.95. Net revenues of $22,322 million improved 10.4% year over year and surpassed the Zacks Consensus Estimate of $21,609 million. Revenues benefited from a robust price/mix in the reported quarter.
PEP expects organic revenue growth of 10% for 2023 compared with the 8% rise estimated earlier. PEP expects core earnings per share of $7.47 for 2023 compared with the $7.27 forecast earlier.
PepsiCo has an expected revenue and earnings growth rate of 6.4% and 9.9%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 2.2% over the last 30 days.
Johnson & Johnson (JNJ - Free Report) reported quarterly earnings of $2.80 per share, which outpaced the Zacks Consensus Estimate of $2.61. Sales came in at $25.53 billion, beating the Zacks Consensus Estimate of $24.68 billion.
JNJ raised its revenue guidance to a range of $98.8 billion to $99.8 billion from $97.9 billion to $98.9 billion. This guidance excludes any revenues from its COVID-19 vaccine. JNJ’s adjusted earnings per share guidance was raised from a range of $10.60-$10.70 to $10.70 -$10.80.
Johnson & Johnson has an expected revenue and earnings growth rate of 5.3% and 5.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.8% over the last seven days.
Alphabet Inc. (GOOGL - Free Report) reported earnings of $1.44 per share, beating the Zacks Consensus Estimate by 9.1%. Net revenues, excluding total traffic acquisition costs or TAC (the portion of revenues shared with Google’s partners and amounts paid to distribution partners and others who direct traffic to the Google website), was $62.07 billion, which surpassed the consensus mark of $60.24 billion.
Top-line growth was driven by the solid momentum in GOOGL’s cloud business and improvements in Search and YouTube’s performance. Strength in the Other Bets segment also acted as a catalyst.
Alphabet has an expected revenue and earnings growth rate of 6.2% and 18.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.9% over the last 90 days.
Intuitive Surgical Inc. (ISRG - Free Report) reported quarterly adjusted earnings per share of $1.42, beating the Zacks Consensus Estimate of $1.32. The company reported revenues of $1.76 billion, outpacing the Zacks Consensus Estimate by 1.4%.
ISRG witnessed continued growth in its da Vinci procedure volume. Although COVID-19 cases adversely impacted its procedure volume in China during the quarter, the country plans to add 559 robotic systems in the coming years. ISRG will provide some of these systems, mostly between 2024 and 2027. This will drive its top-line growth significantly.
Intuitive Surgical has an expected revenue and earnings growth rate of 14.5% and 18.8%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.6% over the last seven days.