The Wall Street rally in the first seven months of this year suffered a severe setback consecutively in August and September. Market participants are worried as the Fed warned of one more rate hike of 25 basis points by the end of this year and pursued a higher interest rate regime for a longer period. The first rate cut is not expected before September 2024 and the inflation rate is unlikely to decline to the central bank’s target rate of 2% before 2026.
However, October is historically known as being favorable to U.S. stock markets. Moreover, this year, we have identified three factors that are likely to help Wall Street to regain its mojo. Below, we will briefly discuss these three positive catalysts.
Equities Have Corrected to a Good Extent
The three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — tumbled 3.5%, 4.9% and 5.8%, respectively, in September after sliding 2.4%, 1.8% and 2.2%, respectively, in August. In third-quarter 2023 — the Dow, the S&P 500 and the Nasdaq Composite — have declined 2.6%, 3.7% and 4.1%, respectively.
Stocks of several corporate giants with a well-established business model internationally, a robust financial position and globally acclaimed brand recognition are currently available at attractive valuations.
CNBC reported that Adam Turnquist, chief technical strategist at LPL Financial, pointed out that stocks reached oversold levels at the end of September as the Relative Strength Index (RSI) on the S&P 500 — a momentum indicator used to measure the speed and magnitude of price action — dropped to its lowest reading in 12 months.
Inflation is Dwindling Steadily
The personal consumption expenditure (PCE) price index rose 0.1% in August compared with 0.6% in July. The headline PCE inflation rose 3.5% year over year, slightly higher than 3.2% reported in June. However, that was primarily due to a recent spike in energy prices.
The core (excluding volatile food and energy items) PCE price index — Fed’s favorite inflation gauge — rose 0.1% in August compared with 0.2% in July. Year over year, the core PCE inflation increased 3.9% in August compared with 4.3% in July. The metric for August was the lowest since November 2020 and the first below 4% reading in nearly two years.
The inflation rate is systematically dwindling since its peak in June 2022, barring some minor fluctuations. This indicates that the Fed’s policy of a tight monetary control and pursuing of a higher interest rate regime are finally paying off.
This is more evident from the fact that personal spending — the largest driver of the U.S. economy — rose 0.4% on the current-dollar term in August, sharply lower than 0.9% in July. The real consumption expenditure rose a mere 0.1% in August compared with 0.6% in July. This may compel the Fed to think twice before hiking interest rates further.
Improved Q3 2023 Earnings Expectations
Last but not least is the third-quarter 2023 earnings season, which will be kicked off in the second week of this month. Our projections have shown that the earnings estimate revisions trend has stabilized since April.
At present, our estimate has shown that the total earnings of the S&P 500 Index will likely drop 1.9% year over year in Q3 on 0.9% higher revenues. This compared with year-over-year 7.1% lower earnings on 1.1% higher revenues in Q2 and year-over-year 3.4% lower earnings on 4.7% higher revenues in Q1. More importantly, our current projections are showing positive estimate revision trends for both earnings and revenues for the next three quarters (Q4 2023, Q1 2024 and Q2 2024).
This indicates that the fundamentals of the U.S. economy remain rock solid. Moreover, a resilient labor market and a stable wage rate scenario may enable the Fed to achieve a soft landing of the U.S. economy.
Our Top Picks
At this stage, it will be prudent to invest in momentum stocks. We have narrowed our search to five large-cap (market capital > $10 billion) stocks that have strong momentum for October.
These companies have strong potential for the rest of 2023. These stocks have seen positive earnings estimate revisions in the last seven days. Each of our picks carries a Zacks Rank #1 (Strong Buy) and has a Momentum Score of A.
Caterpillar Inc. CAT has seen year-over-year revenue and earnings growth for nine straight quarters thanks to its cost-saving actions, strong end-market demand and pricing actions that offset the impact of supply-chain snarls and cost pressures. We expect the company’s adjusted earnings per share for 2023 to grow 19.5% and revenues to rise 7.6%.
Caterpillar has an expected revenue and earnings growth rate of 12.7% and 43.4%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last seven days.
Emerson Electric Co. EMR has been benefitting from healthy demand across end markets. Strong demand across the process and hybrid markets are driving EMR’s underlying sales. The successive deals to acquire Afag and Flexim spark optimism. Emerson Electric’s $8.2 billion deal to acquire National Instruments holds promise. EMR’s bullish guidance for fiscal 2023 is encouraging.
Emerson Electric has an expected revenue and earnings growth rate of 5.3% and 10.2%, respectively, for the current year (ending September 2024). The Zacks Consensus Estimate for current-year earnings has improved 1% over the last seven days.
Copart Inc. CPRT enjoys a leadership position in the automotive auction market, commanding roughly 40% of the market share. CPRT’s competitiveness is supported by its multiple locations and size of its new facility openings.
Copart has an expected revenue and earnings growth rate of 7.6% and 11.1%, respectively, for the current year (ending July 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.5% over the last seven days.
Vertiv Holdings Co. VRT designs, manufactures, and services critical digital infrastructure technologies and life cycle services for data centers, communication networks, and commercial and industrial environments in the Americas, the Asia Pacific, Europe, the Middle East, and Africa. VRT offers hardware, software, analytics and ongoing services.
Vertiv Holdings has an expected revenue and earnings growth rate of 20% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.6% over the last seven days.
Pioneer Natural Resources Co.’s PXD total holding of more than 1 million net acres in the Permian basin will support long-term oil production growth. PXD’s divestment of Delaware Basin assets reflects its strategic move to redirect its full attention towards its more lucrative assets in the Permian Basin. PXD expects year-over-year higher hydrocarbon production volumes in 2023. With rising production in a highly favorable crude pricing environment, PXD’s profitability may benefit.
Pioneer Natural Resources has an expected revenue and earnings growth rate of 10.6% and 18.7%, respectively, for next year. The Zacks Consensus Estimate for next-year earnings has improved 2.1% over the last seven days.
Caterpillar Inc. (CAT): Free Stock Analysis Report
Emerson Electric Co. (EMR): Free Stock Analysis Report
Pioneer Natural Resources Company (PXD): Free Stock Analysis Report
Copart, Inc. (CPRT): Free Stock Analysis Report
Vertiv Holdings Co. (VRT): Free Stock Analysis Report
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