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Dow Achieves New Milestone, Regains Momentum for 2H: 5 Picks
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Wall Street has been witnessing an impressive rally for the past 18 months. However, the rally was so far primarily driven by technology stocks, buoyed by massive application of generative artificial intelligence (AI) worldwide.
Consequently, the tech-heavy Nasdaq Composite and the broad-market S&P 500 indexes jumped during this period. On the other hand, the performance of the Dow remained muted as it is more inclined to rate-sensitive cyclical sectors like industrials, financials, materials and energy.
Situation Changes
Meanwhile, the situation took a drastic turn in the last five trading sessions following the release of several soft economic data. The PCE and the core PCE price index for May and CPI for June came in weaker than expected. These readings significantly raise market participants’ expectations for a sooner-than-expected rate cut.
Moreover, weak readings for several metrics of the resilient labor market, weak manufacturing and services PMIs, and soft orders for both durable and non-durable goods indicate that the U.S. economy is cooling.
Finally, on Jul 15, speaking at the Economic Club of Washington D.C., Fed Chairman Jerome Powell said that the central bank may not wait for the inflation rate to cool to its 2% target before implementing an interest rate cut.
According to Powell, “The implication of that is that if you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%. The Fed is looking for greater confidence and what increases that confidence in that is more good inflation data, and lately here we have been getting some of that.”
Rate Cut Expectations Rise
The benchmark interest rate is currently in the range of 5.25-5.5%, marking the highest level in 23 years. The yield on the benchmark 10-Year U.S. Treasury Note fell to 4.166% from 4.793% in mid-April.
The CME FedWatch tool currently shows a 100% probability of a Fed fund rate cut by 25 basis points in September. This probability was around 62% in late June. Moreover, the interest rate derivative tool also shows a 96% probability of two rate cuts by the end of 2024.
Dow Regains Momentum
Following these developments, investors’ attention has shifted from overvalued technology stocks to rate-sensitive beaten-down cyclical stocks. On Jul 17, the blue-chip index closed above the crucial technical barrier of 41,000, for the first time. In intraday trading, the index recorded an all-time high of 41,221.98. Month to date, the Dow is up 5.3%. Year to date, the index has rallied 9.2%.
Technically, at its current level of 41,198.08, the Dow is well above its 50-day and 200-day moving averages of 39,207.05 and 37,494.14, respectively. The 50-day moving average line is generally recognized as a short-term trendsetter in financial literature, while the 200-day moving average is considered a long-term trendsetter.
Historically it has been noticed in the technical analysis space that whenever the 50-day moving average line surges ahead of the 200-day moving average line, a long-term uptrend for the asset (in this case the Dow Index) becomes a strong possibility.
Our Top Picks
We have narrowed our search to five Dow stocks that have strong earnings growth potential for the rest of 2024. These stocks have seen positive earnings estimate revisions in the last 60 days. Finally, 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 year to date.
Image Source: Zacks Investment Research
Amazon.com Inc. (AMZN - Free Report) is gaining on solid Prime momentum owing to ultrafast delivery services and a strong content portfolio. A deepening focus on generative AI is a major plus. Strengthening relationships with third-party sellers is a positive for AMZN.
The strong adoption rate of AWS is aiding AMZN’s cloud dominance. Improving Alexa skills along with robust smart home offerings are tailwinds. The advertising business is also pretty robust. AMZN enjoys a strong global presence and solid momentum among small and medium businesses. Growing capabilities in grocery, pharmacy, healthcare and autonomous driving are its other positives.
Zacks Rank #1 Amazon.com has an expected revenue and earnings growth rate of 11% and 57.9%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.9% over the last 60 days.
Apple Inc. (AAPL - Free Report) has been playing catch-up in the AI space compared with Alphabet, Microsoft and Amazon, its peers in the “magnificent seven” group. Following the launch of Apple Intelligence, AAPL’s competitive position is expected to improve. Moreover, AAPL is benefiting from increasing customer engagement in the services segment.
The expanding content portfolio of Apple TV+ and Apple Arcade helped drive subscriber growth. AAPL’s top-line benefits from strong growth in emerging markets and the growing adoption of its devices among enterprises.
Zacks Rank #2 Apple has an expected revenue and earnings growth rate of 0.8% and 7.5%, respectively, for the current year (ending September 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 30 days.
Walmart Inc. (WMT - Free Report) has been gaining from its highly diversified business with contributions from various segments, channels and formats. WMT has been benefiting from an increase in in-store and digital channel traffic due to its robust omnichannel initiatives. Store-fulfilled delivery sales jumped 50% in the first quarter of fiscal 2025.
Walmart’s strategic focus on enhancing delivery services has also been rewarding, as evidenced by the constant increase in the market share for groceries. Upsides like these, along with growth in the advertising business, fueled WMT’s first-quarter results and led to an encouraging fiscal 2025 view.
Zacks Rank #2 Walmart has an expected revenue and earnings growth rate of 4.3% and 9.5%, respectively, for the current year (ending January 2025). The Zacks Consensus Estimate for current-year earnings has improved 3% over the last 60 days.
Honeywell International Inc. (HON - Free Report) has been benefiting from strength in the commercial aviation, building automation and UOP businesses. The aviation segment of HON is particularly strong, driven by robust demand in the aviation aftermarket. A strong commercial aftermarket and solid commercial aviation demand led by strength in the air transport aftermarket are aiding HON’s Aerospace segment. Handsome rewards to shareholders add to the stock’s appeal.
Zacks Rank #2 Honeywell International has an expected revenue and earnings growth rate of 5.5% and 10.9%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the last 30 days.
JPMorgan Chase & Co. ‘s (JPM - Free Report) shares have outperformed the industry over the past three months. Higher interest rates for the longer time, strategic acquisitions and partnerships, opening new branches and solid loan and deposit balances are expected to keep aiding net interest income (NII), while higher funding costs will weigh on JPM.
Although there has been a resurgence in global deal-making activities, a complete revival will still take some time. Thus, the performance of the investment banking business of JPM is expected to be decent in the near term. JPM’s enhanced capital distributions seem sustainable.
Zacks Rank #2 JPMorgan Chase has an expected revenue and earnings growth rate of 6.3% and 2.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.3% over the last seven days.
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Dow Achieves New Milestone, Regains Momentum for 2H: 5 Picks
Wall Street has been witnessing an impressive rally for the past 18 months. However, the rally was so far primarily driven by technology stocks, buoyed by massive application of generative artificial intelligence (AI) worldwide.
Consequently, the tech-heavy Nasdaq Composite and the broad-market S&P 500 indexes jumped during this period. On the other hand, the performance of the Dow remained muted as it is more inclined to rate-sensitive cyclical sectors like industrials, financials, materials and energy.
Situation Changes
Meanwhile, the situation took a drastic turn in the last five trading sessions following the release of several soft economic data. The PCE and the core PCE price index for May and CPI for June came in weaker than expected. These readings significantly raise market participants’ expectations for a sooner-than-expected rate cut.
Moreover, weak readings for several metrics of the resilient labor market, weak manufacturing and services PMIs, and soft orders for both durable and non-durable goods indicate that the U.S. economy is cooling.
Finally, on Jul 15, speaking at the Economic Club of Washington D.C., Fed Chairman Jerome Powell said that the central bank may not wait for the inflation rate to cool to its 2% target before implementing an interest rate cut.
According to Powell, “The implication of that is that if you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%. The Fed is looking for greater confidence and what increases that confidence in that is more good inflation data, and lately here we have been getting some of that.”
Rate Cut Expectations Rise
The benchmark interest rate is currently in the range of 5.25-5.5%, marking the highest level in 23 years. The yield on the benchmark 10-Year U.S. Treasury Note fell to 4.166% from 4.793% in mid-April.
The CME FedWatch tool currently shows a 100% probability of a Fed fund rate cut by 25 basis points in September. This probability was around 62% in late June. Moreover, the interest rate derivative tool also shows a 96% probability of two rate cuts by the end of 2024.
Dow Regains Momentum
Following these developments, investors’ attention has shifted from overvalued technology stocks to rate-sensitive beaten-down cyclical stocks. On Jul 17, the blue-chip index closed above the crucial technical barrier of 41,000, for the first time. In intraday trading, the index recorded an all-time high of 41,221.98. Month to date, the Dow is up 5.3%. Year to date, the index has rallied 9.2%.
Technically, at its current level of 41,198.08, the Dow is well above its 50-day and 200-day moving averages of 39,207.05 and 37,494.14, respectively. The 50-day moving average line is generally recognized as a short-term trendsetter in financial literature, while the 200-day moving average is considered a long-term trendsetter.
Historically it has been noticed in the technical analysis space that whenever the 50-day moving average line surges ahead of the 200-day moving average line, a long-term uptrend for the asset (in this case the Dow Index) becomes a strong possibility.
Our Top Picks
We have narrowed our search to five Dow stocks that have strong earnings growth potential for the rest of 2024. These stocks have seen positive earnings estimate revisions in the last 60 days. Finally, 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 year to date.
Image Source: Zacks Investment Research
Amazon.com Inc. (AMZN - Free Report) is gaining on solid Prime momentum owing to ultrafast delivery services and a strong content portfolio. A deepening focus on generative AI is a major plus. Strengthening relationships with third-party sellers is a positive for AMZN.
The strong adoption rate of AWS is aiding AMZN’s cloud dominance. Improving Alexa skills along with robust smart home offerings are tailwinds. The advertising business is also pretty robust. AMZN enjoys a strong global presence and solid momentum among small and medium businesses. Growing capabilities in grocery, pharmacy, healthcare and autonomous driving are its other positives.
Zacks Rank #1 Amazon.com has an expected revenue and earnings growth rate of 11% and 57.9%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.9% over the last 60 days.
Apple Inc. (AAPL - Free Report) has been playing catch-up in the AI space compared with Alphabet, Microsoft and Amazon, its peers in the “magnificent seven” group. Following the launch of Apple Intelligence, AAPL’s competitive position is expected to improve. Moreover, AAPL is benefiting from increasing customer engagement in the services segment.
The expanding content portfolio of Apple TV+ and Apple Arcade helped drive subscriber growth. AAPL’s top-line benefits from strong growth in emerging markets and the growing adoption of its devices among enterprises.
Zacks Rank #2 Apple has an expected revenue and earnings growth rate of 0.8% and 7.5%, respectively, for the current year (ending September 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.2% over the last 30 days.
Walmart Inc. (WMT - Free Report) has been gaining from its highly diversified business with contributions from various segments, channels and formats. WMT has been benefiting from an increase in in-store and digital channel traffic due to its robust omnichannel initiatives. Store-fulfilled delivery sales jumped 50% in the first quarter of fiscal 2025.
Walmart’s strategic focus on enhancing delivery services has also been rewarding, as evidenced by the constant increase in the market share for groceries. Upsides like these, along with growth in the advertising business, fueled WMT’s first-quarter results and led to an encouraging fiscal 2025 view.
Zacks Rank #2 Walmart has an expected revenue and earnings growth rate of 4.3% and 9.5%, respectively, for the current year (ending January 2025). The Zacks Consensus Estimate for current-year earnings has improved 3% over the last 60 days.
Honeywell International Inc. (HON - Free Report) has been benefiting from strength in the commercial aviation, building automation and UOP businesses. The aviation segment of HON is particularly strong, driven by robust demand in the aviation aftermarket. A strong commercial aftermarket and solid commercial aviation demand led by strength in the air transport aftermarket are aiding HON’s Aerospace segment. Handsome rewards to shareholders add to the stock’s appeal.
Zacks Rank #2 Honeywell International has an expected revenue and earnings growth rate of 5.5% and 10.9%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the last 30 days.
JPMorgan Chase & Co. ‘s (JPM - Free Report) shares have outperformed the industry over the past three months. Higher interest rates for the longer time, strategic acquisitions and partnerships, opening new branches and solid loan and deposit balances are expected to keep aiding net interest income (NII), while higher funding costs will weigh on JPM.
Although there has been a resurgence in global deal-making activities, a complete revival will still take some time. Thus, the performance of the investment banking business of JPM is expected to be decent in the near term. JPM’s enhanced capital distributions seem sustainable.
Zacks Rank #2 JPMorgan Chase has an expected revenue and earnings growth rate of 6.3% and 2.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.3% over the last seven days.