Volatility has returned on Wall Street since the beginning of August after an impressive rally in the first seven months of 2023. Several gloomy pictures across the world have dented market participants’ confidence in risky assets like equities. Although the long-term trend is still bullish, investors should prepare for short-term fluctuations to protect their portfolios.

U.S. Banks Under Rating Watch

On Aug 15, Fitch Ratings warned that it may downgrade ratings of more than a dozen U.S. heavyweight banks in the near future. The rating agency already cut its assessment of the U.S. banking sector in June.

Fitch said that another one-notch downgrade of the banking sector’s rating from AA- to A+ will compel the rating agency to reevaluate the ratings of all 70 U.S, banks that it covers for possible downgrade.

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.

Global Concerns

China, the second-largest economy of the world, the facing serious challenges as it is still to recover from the aftershock of COVID-19. The country’s industrial production and retail sales grew less than expected in June.

China is facing deflation and its prosperous real estate sector is on the verge of collapse. In order to generate growth and gain investors’ confidence, the People’s Bank of China lowered interest rates by 15 basis points to 2.5% from 2.65%. However, it has failed to deliver so far.

On the other hand, Russia’s central bank sharply hiked the benchmark interest rate to 12% from 8.5% The move is aimed to restore the exchange value of its currency rubble from a steady decline. The central bank said that it may hike interest rate further in the near future.

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.

Uncertainty on Fed’s Future Move

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. The central bank reinitiated the rate hike regime as the inflation rate remained elevated at almost double the Fed’s 2% target rate.

Despite a steady decline in the consumer price index, the producer price index (PPI) increased 0.3% month-over-month in July, higher-than-the consensus estimate of 0.2%. Core PPI (excluding volatile food, energy, and trade services) increased 0.2% month-over-month in July, marking its highest increase since February.

The labor market remains resilient and the average wage rate increased in July. Retail sales in July increased 0.7% month-over-month, marking the best monthly performance since January. Core retail sales (excluding auto sales) in July increased 1% month-over-month, beating the consensus estimate of 0.4%, marking the best month since January.

The central bank remains open to more rate hikes, depending on economic data. A resilient labor market and solid consumer spending may compel the Fed to go for more rate hike.

Our Top Picks

At this stage, investment in low-beta stocks with a favorable Zacks Rank may be the best option. If markets regain momentum, the favorable Zacks Rank of these stocks will capture the upside potential. However, if the downtrend continues, low-beta stocks will minimize portfolio losses.

We have narrowed our search to five low-beta (beta >0 <1) stocks. These companies have strong earnings growth 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 #1 (Strong Buy).

Domino’s Pizza Inc. DPZ is benefiting from a solid digital ordering system and higher global retail sales. This and DPZ’s focus on menu additions bode well. Although the initiative paves the way for increased costs in delivery orders, attributes such as variety, great taste and competitive pricing are likely to have helped DPZ achieve balanced growth across tickets and orders in the long term.

Domino’s Pizza has an expected revenue and earnings growth rate of 0.1% and 9.6%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.4% over the last 30 days.

Martin Marietta Materials Inc.’s MLM earnings in first-quarter 2023 remarkably topped the Zacks Consensus Estimate and gained year over year. Revenues also beat the Zacks Consensus Estimate and rose from the prior year. MLM expects solid near-term product demand backed by healthy customer backlogs across its coast-to-coast footprint. MLM has raised its revenues expectations to $6,600-$6,815 million from $6,180-$6,370 million.

Martin Marietta Materials has expected revenue and earnings growth rates of 19.1% and 42.3%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 7.5% over the last 30 days.

Arch Capital Group Ltd. ACGL boasts a strong product portfolio and has been maintaining an exemplary track record of premium growth. Premiums should benefit ACGL from new business opportunities, rate increases, growth in existing accounts and growth in Australian single premium mortgage insurance. ACGL has been diversifying its Mortgage Insurance business via strategic acquisitions that complement the strength in the specialty insurance and reinsurance businesses.

Arch Capital Group has expected revenue and earnings growth rates of 30.6% and 38.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 2.3% over the last seven days.

Aspen Technology Inc.’s AZPN engineering business segment benefited from improving business environment for EPC customers and a growing energy market. AZPN’s SSE business continues to witness healthy momentum. AZPN’s Digital Grid Management segment is likely to benefit from global electrification and grid upgrades. Frequent product launches and synergies from acquisitions are the other tailwinds.

Aspen Technology has an expected revenue and earnings growth rate of 8.7% and 9.5%, respectively, for the current year (ending June 2025). The Zacks Consensus Estimate for current-year earnings has improved 6.3% over the last 30 days.

Erie Indemnity Co. ERIE operates as a managing attorney-in-fact for subscribers at the Erie Insurance Exchange in the United States. ERIE provides sales, underwriting, policy issuance, and renewal services for the policyholders on behalf of the Erie Insurance Exchange.

Erie Indemnity has an expected revenue and earnings growth rate of 12.5% and 32.9%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5.4% over the last 30 days.
Domino’s Pizza Inc (DPZ): Free Stock Analysis Report

Martin Marietta Materials, Inc. (MLM): Free Stock Analysis Report

Erie Indemnity Company (ERIE): Free Stock Analysis Report

Arch Capital Group Ltd. (ACGL): Free Stock Analysis Report

Aspen Technology, Inc. (AZPN): Free Stock Analysis Report

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