Wall Street has been witnessing volatile trading since the beginning of August. U.S. stock markets saw an impressive rally in the first seven months of this year after a disappointing 2022. Although the long-term trend is still bullish, investors should prepare for short-term fluctuations to protect their portfolios. Recent volatility arises primarily from three sources.
Fed Reinitiates Interest Rate Hike
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 taking a pause in the June 2023 meeting.
It reinitiated the rate hike 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.” The central bank remains open to more rate hikes, depending on economic data.
Fitch Downgrades U.S. Rating
On Aug 1, Fitch Ratings downgraded the U.S long-term foreign currency issuer default rating to AA+ from AAA. The agency cited “expected fiscal deterioration over the next three years.” In May, Fitch placed the AAA rating of the nation on the negative watchlist.
Fitch expects the general government deficit to rise to 6.3% of U.S. GDP in 2023 from 3.7% in 2022. The agency remained concerned about a steady deterioration in the standards of governance over the last 20 years. Notably, in 2011, S&P had downgraded the U.S. credit rating to AA+ from AAA.
Moody’s Downgrade Ratings of U.S. Banks
On Aug 8, Moody’s Investors Service cut the rating of 10 small and mid-sized U.S. banks by a single notch. Moreover, the rating agency put six big banks under review for a potential downgrade. Moody’s also changed its rating outlook to negative for 11 banks.
According to Moody’s, “U.S. banks continue to contend with interest rate and asset-liability management risks with implications for liquidity and capital, as the wind-down of unconventional monetary policy drains systemwide deposits and higher interest rates depress the value of fixed-rate assets.”
The rating agency also said “Meanwhile, many banks’ Q2 results showed growing profitability pressures that will reduce their ability to generate internal capital. This comes as a mild U.S. recession is on the horizon for early 2024 and asset quality looks set to decline from solid but unsustainable levels, with particular risks in some banks’ commercial real estate portfolios.”
Our Top Picks
We have narrowed our search to five stocks from defensive sectors like consumer staples, health care and utilities to safeguard one’s portfolio. These stocks have strong potential for the rest of 2023 and have seen positive earnings estimate revisions in the last 30 days. Each of our picks carries a Zacks Rank #2 (Buy).
PepsiCo Inc. PEP 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 6.7% and 10.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 2.6% over the last 30 days.
Johnson & Johnson JNJ 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 5.5% and 5.8%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last seven days.
Intuitive Surgical Inc. ISRG 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 14.7% and 18.8%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.6% over the last 30 days.
Kimberly-Clark Corp. KMB has been benefiting from its three growth pillars. These include focusing on improving KMB’s core business in the developed markets, speeding up the growth of the Personal Care segment in developing and emerging markets and enhancing digital and e-commerce capacities. Apart from this, KMB’s pricing and saving initiatives have been aiding amid cost inflation.
Kimberly-Clark has an expected revenue and earnings growth rate of 1.5% and 14.2%, respectively, for the current year. The Zacks Consensus Estimate for next-year earnings has improved 3.2% over the last 30 days.
Atmos Energy Corp. ATO continues to benefit from rising demand, courtesy of an expanding customer base. ATO’s long-term investment plan will further help to increase the safety and reliability of its natural gas pipelines. ATO gains from industrial customer additions and constructive rate outcomes. Returns within a year of capital investment, will further boost the company’s performance. ATO has enough liquidity to meet debt obligations.
Atmos Energy has an expected revenue and earnings growth rate of 18.2% and 8.2%, respectively, for the current year (ending September 2023). The Zacks Consensus Estimate for next-year earnings has improved 0.5% over the last 30 days.
Johnson & Johnson (JNJ): Free Stock Analysis Report
Intuitive Surgical, Inc. (ISRG): Free Stock Analysis Report
Kimberly-Clark Corporation (KMB): Free Stock Analysis Report
PepsiCo, Inc. (PEP): Free Stock Analysis Report
Atmos Energy Corporation (ATO): Free Stock Analysis Report
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