In its July FOMC meeting, 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 has hiked interest rate in 10 consecutive FOMC meetings before taking a pause in the June 2023 meeting.

Although, the Fed remained open for more rate hikes depending on economic data, the central bank is more confident now that a soft landing for the U.S. economy is possible. Importantly, recently released several key economic data have clearly indicated that a soft landing is a foregone conclusion. The U.S. economy is readying itself for a new take off.

Inflation is Dwindling Steadily

The inflation rate has been declining steadily since its peak in June 2022. The headline CPI (consumer price index) fell to 3% in June 2023 from 9.1% in June 2022. The metric for June 2023 marked the smallest 12-month increase since March 2021. The core CPI (excluding volatile food and energy items) increased 4.8% year-over-year in June 2023.

The headline PCE inflation rose 3% year-over-year in June 2023, marking its lowest rate since March 2021. The core PCE price index — Fed’s favorite inflation gauge — rose 4.1% year over year last month, the lowest annual rate since September 2021.

Resilient U.S. Economy

U.S. GDP grew 2.4% in second-quarter 2023 after rising 2% in the first-quarter. In the second quarter, PCE inflation and core PCE inflation increased 2.6% and 3.8%, respectively, compared with 4.1% and 4.9%, in the first quarter.

In June 2023, the U.S. economy added 209,000 jobs, inline with the last 20-year average. Weekly jobless claims have been declining for the last four reported weeks. Month over month, personal expenditure — the largest driver of the GDP — rose 0.5% in June compared with 0.2% in May. The personal savings rate stayed healthy at 4.3%.

Moreover, second-quarter 2023 earnings are stable and resilient at the middle of the reporting cycle. The earnings picture is not great, but it is not miserable either. Most of the companies, reported so far, have given upbeat guidance.

Consumers Seem More Confident

The Conference Board’s consumer confidence index surged to 117 in July from 110.1 in June. The Present Situation sub-index—based on consumers’ assessment of current business and labor market conditions—improved to 160.0 in July from 155.3 last month.

The Expectations sub-index—based on consumers’ short-term outlook for income, business, and labor market conditions—improved to 88.3 from 80.0 in June. Importantly, the Expectations sub-index climbed to well above 80 — the level historically associated with a near-term recession.

The Conference Board said that U.S. consumers seem more confident supported by a lower inflation rate and a tight labor market. A similar kind of study by the University of Michigan — Consumer Sentiment Index — came in at 71.6 in July 2023, its highest level since October 2021.

Ready for a New Takeoff

The Fed raised the benchmark interest rate sharply by 5.25% from March 2022 to July 2023. Despite adopting extreme monetary hardness, the fundamentals of the U.S. economy remain rock solid. The Fed may hike interest rate one more time by 25-basis point. The combined effect of the July rate hike and one more (if at all) is likely to bring down inflation sharply, which will be visible through the economic data for the next several months.

Now think about 2024, when it is expected that the monetary policy will be relaxed and rate cut will be initiated. If the ongoing hardship fails to push the economy into a recession, we can safely assume that the relaxation of tight monetary control will reinvigorate the U.S. economy. The world’s largest economy will show a new takeoff.

Main Street Will Have Repercussion on Wall Street

A robust U.S. economy would certainly accelerate this year’s impressive Wall Street rally. The tech-heavy Nasdaq Composite and the broad-market index — the S&P 500 — have jumped 36.8% and 19.3%, respectively, year to date. The blue-chip Dow, which lagged in the first-half, regained momentum buoyed by strong earnings results in July and is currently up 7% year to date.

The Wall Street rally of 2023 is broad-based. The first-half was predominantly driven by the tech sector supported by massive A.I. adoption. Another growth sector — consumer discretionary — was also a key catalyst. The cyclical sectors have played their part since the beginning of the second-half.

Aside from the three large-cap benchmarks, the small-cap centric Russell 2000 and the mid-cap specific S&P 400 have rallied 12.5% and 11.8%, respectively, year to date. These two indexes have gathered pace since May.

How to Invest

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.

Based on the above-mentioned criteria, we have narrowed our search to five U.S. corporate behemoths. These companies are: Meta Platforms Inc. META, The Coca-Cola Co. KO, Johnson & Johnson JNJ, Alphabet Inc. GOOGL and PepsiCo Inc. PEP. Each of our picks carries a Zacks Rank #2 (Buy).

CocaCola Company (The) (KO): Free Stock Analysis Report

Johnson & Johnson (JNJ): Free Stock Analysis Report

PepsiCo, Inc. (PEP): Free Stock Analysis Report

Alphabet Inc. (GOOGL): Free Stock Analysis Report

Meta Platforms, Inc. (META): Free Stock Analysis Report

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