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Q4 Is The Best Quarter Of The Year For Stocks! Are You Ready?

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Stocks got off to a rocky start this month. But the odds for a strong finish are in the bull’s favor.

The market typically performs well in October. The month has gotten a bad rap since some high-profile crashes took place in October in the past, including the Panic of 1907, Black Tuesday in 1929, and Black Monday in 1987. But overall, October fares pretty well.

Same goes for Q4.

In fact, historically, it’s considered the best quarter of the year.

Since 1950, the S&P has increased in the last 3 months of the year by more than 4%. And it’s up 80% of the time.

So, if we see any more weakness this month, I’d be looking for places to buy rather places to sell. Because the stats suggest a sizeable move up to follow.

But if stocks end up breaking out to the upside this month, I’d be buying on strength just the same.

And with the interest rate-cutting cycle having just begun, that also bodes well for the market, as stocks typically do well when interest rates are lowered.

As spectacular as this year has been so far, it looks like we’re getting ready to finish the year on an even stronger note.

And there’s plenty of reason to believe the market is entering a new phase that could extend this bull market rally to a whole new level.

Market Rotation

Large-cap tech/AI dominated stocks (the largest ones often referred to as the Magnificent 7), had been leading the market for most of the year.

Those stocks had been the key drivers of the rally. And it sent the market-weighted S&P 500 and tech-heavy Nasdaq to new heights. In the first half of the year, the S&P was up 14.5%, with the Nasdaq up 18.1%, all while the neglected small-cap Russell 2000 only added 1.02%.

Mid-caps also lagged, gaining just 5.34%. And even the Dow trailed with only 3.79%.

The Magnificent 7 (or Mag 7) is comprised of 7 of the largest stocks by market-cap, which are: Apple, Microsoft, NVIDIA, Alphabet (i.e. Google), Amazon, Meta, and Tesla.

As you know, the S&P is a weighted index, so the largest stocks have their gains amplified due to their higher weighting.

And those 7 stocks had an oversized impact on the market’s returns. For the first 6 months of the year, the Magnificent 7 made up 59.5% (just under 60%) of the S&P’s gains.

To put this into perspective, the full market-weighted S&P was up 14.5% in the first half. But if you take out the Mag 7, the S&P would’ve only been up 5.86%.

Pretty amazing.

You can also see the over-influence of those stocks (and other large-caps) on the market-weighted index, when you compare it to the equal-weighted S&P. There, each stock is weighted the same as the others, large and small alike. And for the first 6 months of the year, the equal-weighted index was up just 4.10% to the market-weighted 14.5%.

Stark difference.

But a market rotation is underway and it should allow for a big game of catch up for the ignored small-caps, and even other well-deserving mid-caps and large-caps.

Market rotation is just what it sounds like – investors rotate out of some stocks and into others.

And since large-cap tech/AI dominated stocks have been the biggest movers, that would suggest a rotation out of those stocks, and into other stocks worthy of investor dollars that have been largely ignored.

Continued . . .

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Breadth Expansion

But I don’t see this market rotation as a wholesale dumping of large-caps or the AI trade. Just a lessening of the over-concentration in those names. Especially after the monster-gains they’ve seen.

That trade has worked so well for a reason -- and it’s because the AI boom is real, and is supported by real earnings, and real growth potential.

And AI is shaping up to be just as transformative, if not more so, than the personal computer, the internet, and the mobile phone. And it’s expected to touch virtually every industry in some way shape or form, as well as impact ordinary lives.

So, I don’t see investors shunning those stocks completely. Not by a long shot. Nor should they, as it would be a terrible long-term mistake in my opinion, as the AI boom is a multi-year phenomenon.

And that’s why the S&P and Nasdaq are heading back up.

But so are the other indexes.

That’s because this rotation is more like a bull market breadth expansion.

True, some money may be coming out of large-caps in favor of smaller names, and some money may be coming out of big-tech in favor of other industries.

But the point is, it looks like the bull market is entering a new phase -- by including many more stocks and many more industries.

It should lift the small-cap index, the mid-cap index, the Dow, and even continue to lift the Nasdaq and the S&P 500 as the other stocks in those indexes will get a chance to benefit more broadly as investor dollars start giving those more attention.

And that’s very bullish for the market.

In addition, there are plenty of other reasons why the rest of the year is shaping up to be a historic one.

Cyclical Trends And Other Statistics Benefitting The Market

The 4-year Presidential Cycle shows that year 4 (that’s this year), is the second-best year of all four years (second only to year 3 (last year, when the S&P gained 24.2%), which is the best year of all 4 years).

This is a powerful recurring cycle. And historically, it’s amazing to see how favorable this is for investors.

Additionally, even though we are in the midst of a strong bull market which has seen a series of new high after new high, the market prior to that had gone 24 long months without setting a new high even once.

And it was only in January of this year that we finally eclipsed the previous all-time high from January 2022.

I point this out because history shows in the previous 14 times when the S&P has gone at least a full year without a new high, and then finally made one – a year later it was higher in 13 out of those 14 times, and up nearly 15% on average.

Another interesting statistic, which points back to the big gains we saw in November of last year, bodes well for more gains to follow this year.

Once again, history shows that when the S&P was up by more than 8% in a single month (November 2023 was up by 8.91%), (this has happened 30 times since 1950), a year later the index was higher in 27 out of those 30 times (that’s 90% of the time), with an average return of 15.8%.

Pretty compelling stats.

It also sets a bullish tone for all of the other factors working in the market’s favor this year.

Inflation Continues To Decline, More Interest Rate Cuts Coming

Last month’s better-than-expected Consumer Price Index (CPI), Producer Price Index (PPI), and Personal Consumption Expenditures (PCE) index, shows that inflation continues to ease.

Core (ex-food & energy) CPI (retail inflation) is now at 3.2% y/y, core PPI (wholesale inflation) came in at just 2.4%, and core PPI (the Fed’s preferred inflation gauge) came in at 2.7%.

Fed Chair Jerome Powell has said the economy has made “considerable progress” on inflation, while maintaining a “strong, but not overheated” jobs market.

And that’s why the Fed cut interest rates by 50 basis points last month, putting the Fed Funds midpoint at 4.9%.

Mr. Powell noted that you don’t have to wait until inflation hits 2% before cutting rates (otherwise, you’ve waited too long). You just need the confidence (backed by data) that it’s on its way to 2%.

The Fed also forecast additional cuts of 50 bps by year’s end, putting the Fed Funds rate at 4.4%, and another 100 bps by the end of next year, putting rates at 3.4%.

Lower interest rates are likely to help businesses of all sizes, but they should have a bigger impact on smaller-cap companies, and help increase profit margins.

I should also note with larger rate cuts coming, you’re also likely to see a rotation out of money market funds too, and into a wider selection of stocks as well.

The Outlook Is For Growth

A few months ago, the International Monetary Fund (IMF) raised their global growth forecast to 3.2%, up from January’s forecast of 3.1%.

They also gave the U.S. the biggest upside revision, upping their growth forecast to 2.7% from their previous estimate of 2.1%.

The Eurozone saw a slight downward revision, but is still expected to grow by 0.8% from the previously expected 0.9%.

The European Central Bank’s recent interest rate cuts should only add to those projections.

India’s growth is expected to increase by 6.8%. And China is expected to grow by 4.6%.

China’s announced stimulus measures the other week should aid in their outlook as well. Since the announcement, China’s Hang Seng Index is up more than 15%.

But the IMF specifically singled out the U.S. as being a major driver of global growth this year.

And a growing economy goes hand in hand with a bull market.

Moreover, personal incomes are near all-time highs. An important point when you consider that 70% of our GDP is driven by consumer spending.

And that helps fuel corporate profits.

Q3’24 earnings are expected to be up 3.7%, and sales up 5.1%.

Q4’24 earnings are expected to be up 10.2%, and sales up 5.8%.

Q1’25 is expected to show earnings up 12.8%, and sales up 5.7%.

And Q2’25 is expected to show earnings up 14.0%, and sales up 5.5%.

The earnings picture is one of improvement, and another bullish indicator underpinning the market.

Stocks Are Undervalued

Let’s also not forget that valuations are down.

While the P/E ratio for the S&P has risen from their lows, they are still down sharply from 2021’s peak, and are below where they were the last time stocks were anywhere near this level.

And that makes stocks a bargain.

Then when you factor in the increasing earnings estimates just mentioned, stocks look even more undervalued.

Do What Works

So how do you fully take advantage of the market right now?

By implementing proven, profitable methods that work to find the best stocks.

For example, did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 29 of the last 36 years (an 81% win ratio) with an average annual return of more than 24% per year? That's more than 2 x the S&P, including 4 bear markets and 4 recessions. And consistently beating the market year after year can add up to a lot more than just two times the returns.

Did you also know that stocks in the top 50% of Zacks Ranked Industries outperform those in the bottom 50% by a factor of 2 to 1? There's a reason why they say that half of a stock's price movement can be attributed to the group that it's in. Because it's true!

Those two things will give any investor a huge probability of success and put you well on your way to beating the market.

But you’re not there yet, as those two items alone will only narrow down a field of 10,000 stocks to the top 100 or so. Way too many to trade at once.

So, the next step is to get that list down to the best 5-10 stocks that you can buy.

And one of the best ways to do that is to see what stocks the pros, who use these methods, are picking.

Stock Picking Secrets Of The Pros

Whether you’re a Growth investor, or a Value investor, prefer fast-paced momentum stocks, or mature dividend-paying income stocks, there are certain rules the experts follow to maximize their gains.

If you're an Aggressive Growth investor; did you know that stocks with the highest growth rates perform almost as poorly as those with the lowest growth rates?

This is because the companies with the highest growth rates are often unsustainable. And once those sky-high growth rates start to come down, even though they may still be spectacular, the price of the stock will fall back down to earth as well.

For example, a company earning 1 cent a share that is now expected to earn 6 cents, has a 500% growth rate. But, if it receives a downward estimate revision to 5 cents, that’s a significant drop. Even though it still has a 400% growth rate, the estimates were just reduced by -16.7% and the price is likely to follow.

If you’ve ever wondered how a stock with a triple-digit growth rate could possibly go down -- that’s how.

Instead, stick with companies with growth rates above the median for their industry, but less than 50%. That range has produced some of the best results.

If you're a Value investor; do you know which valuation metrics produce the best results? Better yet, do you know what valuation ranges have the highest probability of success?

Testing has shown that the Price to Sales ratio (P/S) is one of the best valuation metrics out there. And stocks with a P/S ratio of less than 1, by far, produce the highest returns. Between 1-2 still produce stellar results. And between 2-3 outperform the market. But once you get over 4, there is a higher probability of losing on that stock than winning.

That, of course, does not mean all stocks with a P/S ratio above 4 will go down. But if the odds of winning are greater below 1 (or at least below 3) and worse above 4, then by simply focusing on stocks in the optimum valuation range, you are now one step closer to having a winner.

This type of factor analysis also applies to large-caps and small-caps, biotech and high-tech, ETFs, stocks under $10, stocks about to surprise, even options, and everything in between.

Regardless of which one fits your personal style of trade, just be sure you’re following proven profitable methods and strategies that work, from experts who have demonstrated their ability to beat the market.

The best part about these strategies and stock picks is that all of the hard work is done for you. There’s no guesswork involved. Just follow the experts and start confidently getting into better stocks on your very next trade.

The Pros’ Best Picks for Q4

It couldn’t be easier to find them. And it’s a very good plan to buy them at market open Monday morning.

The earlier you get in, the better your chances for maximum profit.

Using the market-doubling Zacks Rank as a foundation, our experts have handpicked four stocks poised to outperform this quarter. Each has strong fundamentals and exceptional growth potential. They’re ideally suited to soar in current trading conditions. And today, we’re revealing these high-potential recommendations to our readers:

Stock #1: This “cloud-first” company has a strong underlying earnings trend in an industry that’s getting hotter by the day. With a unique approach, huge addressable market and AI capabilities, it boasts fantastic growth numbers and a sticky revenue model.

Stock #2: With a market cap of just $6.9 billion, this small retailer’s growth has been neck-and-neck with NVIDIA over the last year. Shares have recently dipped, setting up a buying opportunity for the well-known brand heading into holiday shopping.

Stock #3: Climbing over +40% year to date, this dividend growth stock has vastly outperformed the benchmark S&P 500. It continues shooting past analyst targets and looks positioned for more upside given its trend of positive earnings estimate revisions.

Stock #4: The U.S. is spending trillions revamping and expanding the energy ecosystem as the demand for power booms. As a result, this small-cap stock is thriving, presenting an ideal way to add exposure to trends across energy, sustainability, technology and reshoring.

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You can be one of the first to see these promising recommendations when you download this Special Report today. Opportunity ends at midnight Sunday, October 6.

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Thanks and good trading,

All the best,

Kevin

Kevin Matras serves as Executive Vice President of Zacks.com and is responsible for all of its leading products for individual investors. He invites you to download our just-released Zacks Ultimate Four Special Report before this weekend's deadline.


 

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