Today, Zacks Investment Ideas feature highlights Block SQ, Murphy USA MUSA and Toll Brothers TOL.

We Are So Back: 3 Signs the Bull Market’s Just Getting Started

Remember the beginning of 2023? Analysts were forecasting an imminent recession and the next leg lower in stocks was just around the corner. Yet now, a little more than halfway through the year the S&P 500 is up 20% YTD, and the Nasdaq 100 is up 45%.

In this article I will explain why there are likely more good times ahead and share three Zacks Rank #1 (Strong Buy) stocks investors may want to consider buying now.

What Happened Exactly?

Because the market is so vast and complex it would be remiss of me to try and explain it with a one-off justification. However, one major reason why everyone was so bearish at the beginning of the year was recency bias and anchoring.

Cognitive biases are an important obstacle to address in investing, and it is even more pronounced in crowd psychology like financial news and research. Because 2022 was such a challenging year, investors were quick to assume that we would experience another challenging one, and thus many were caught on the wrong side of the market.

Investors relied heavily on the most recent information, hence recency bias, and anchored their expectations to that data.

But there was no guarantee the economy would roll over, and with inflation easing, employment remaining robust and the Fed forecasting interest rate cuts, markets got the green light to rally. This data was all pointing to a strong year for the stock market.

With positioning leaning heavily on the short side, the rally has become even more rigorous because those who are short need to cover, and those who are underweight stocks need to buy more to catch up.

What’s Next?

Some investors may think, “now that the market has rallied so much, I should take profits and wait for a correction.” But I think investors may risk missing considerable upside following that strategy. There are a number of signals saying that today is just an early stage of a bull market, and rather than ease off the pedal, investors may want to stay aggressive.

Of course, there are no guarantees and investors must remain vigilant. But I think the data points to more good times ahead.

Indexes Retake Psychological Level

Market indexes are now above where they were when rate hikes began.

After clearing the 4200 level the S&P 500 has rallied almost strait up. To think that the stock market could be higher than it was in March 2022 with the Fed Funds Rate now 5% higher is quite unfathomable, yet here we are.

Many thought that higher rates would crush the economy, yet consumers continued to spend, and earnings came in stronger than expected nonetheless.

Energy Signals Strength

Strength in the oil market signals robust global economic growth.

Energy consumption has a strong correlation with economic growth. The more businesses and people spend the more energy they need to consume.

The price of WTI oil is coming up on a major level of resistance that has held down the price of oil all year. While even approaching this level of resistance is a signal of strength in the economy, if it trades above, it will be very significant.

If the price of oil can trade and hold above the $83.50 level, the trend will have shifted considerably more bullish and will further confirm the steadiness of economic growth.

Interest Rates Pointing Down

The market is now pricing in future interest rate cuts. Falling rates will improve financial conditions and lead to further economic growth.

As we can see in the table below, markets now believe that interest rates have peaked, and the Fed will begin to cut rates by the start of next year. This is probably the most significant development listed in this article.

With the market now expecting lower interest rates, financial conditions will continue to ease, businesses and individuals will borrow and spend more, and economic activity will pick up.

Markets aren’t just beginning to anticipate lower interest rates either. Investors have been pricing in lower interest rates for several months now and this has arguably been the primary driver of the market rally this year.

In the National Financial Conditions Index below, we can see that financial conditions have been easing since the week of March 24. Not surprisingly, this aligns very closely with when the market firmed up, and the rally began in earnest.

Stocks to Watch

So where can investors expect to find winning stocks?

The Zacks Rank #1 List is an extremely effective way to find stocks with improved odds of near-term strength because of their upward trending earnings revisions. Additionally, if you can align these stocks with other bullish catalysts investors can expect even further improved returns.

With lower rates on the horizon, growth stocks will likely come back into vogue. Block is one stock that may be a strong performer over the next few months. Block got absolutely decimated in 2022 and corrected -80%, but now sports a far more reasonable valuation because of the fall.

And with earnings growth projected at 20% over the next 3-5 years and sales expected to grow in the high teens, SQ is well positioned for the future. At just 2.4x forward sales it is below the market average of 3.9x, and well below its five-year median of 6x.

Murphy USA is a refueling and convenience store company with 1,700 locations in the US. It has strongly trending earnings revisions and is likely to experience wider profit margins as the price of oil rallies.

Furthermore, it has a reasonable valuation of 14.8x one-year forward earnings, which is below its five-year median of 15.5x and has a 0.5% dividend yield to boot. Murphy USA has raised its dividend payment by an average of 21% annually over the last five years.

And lastly, Toll Brothers, a homebuilder operating in five major segments of the US, should be a major benefactor of this evolving market environment.

With interest rates projected to move lower over the coming year, homebuyers will resume their torrent pace of purchasing and further boost Toll Brothers sales and earnings.  Earnings for TOL are expected to grow by 11% annually over the next 3-5 years.

Homebuilders currently sit in the top 5% of the Zacks Industry Rank and the number one position on the Zacks Sector Rank.

Trading at a one-year forward earnings multiple of 7.6x, Toll Brothers is below the industry average of 10.1x and below its five-year median of 8.1x. Additionally, the stock pays a 1.1% dividend yield, which has been raised by an average of 18.4% annually over the last five years.

Bottom Line

While investors must always be prudent managers of risk, I believe there is a strong chance that we are entering an extended period of good times in the stock market. So long as we avoid another spike in inflation, or major economic downturn, there is likely a big bull run ahead.

Toll Brothers Inc. (TOL): Free Stock Analysis Report

Murphy USA Inc. (MUSA): Free Stock Analysis Report

Block, Inc. (SQ): Free Stock Analysis Report

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