5 top picks as major stock indexes approach record highs

Saturday, September 22, 2018 7:19 AM | Zacks Investment Research

The month of September is traditionally notorious in Wall Street for never providing positive returns. However, the first two weeks of the month this year has balanced the investor’s portfolio with negative and positive returns, with ensuing week already in the positive territory.

Will September break the trend this year? While we await the answer, the three major stock market indexes – the Dow 30, S&P 500 and Nasdaq Composite – are at present within the striking distance to achieve their all-time high level. Consequently, investment in stocks which are part of these indexes with a favorable Zacks Rank and strong growth potential will be a prudent move.

Major Indexes Northbound

The Dow – the 30 stock blue-chip index – is up 6.8% year to date. The index is just 0.8% away from the all-time high of 26,616.71 recorded on Jan 26.

The benchmark S&P 500 index – generally utilized by market participants as the barometer of the broad market movement – is up 8.8% year to date. The index is just 0.3% below the all-time high of 2,916.50 that it set in Aug 29.

The tech-laden Nasdaq Composite is up 15.2% year to date. The index is currently 2.3% away from its record high level of 8,133.30 registered in Aug 30.

Despite severe stock market volatility, all three indexes are at present out of correction territory (a correction is an uplift of 10% from a recent low) which they had entered on Feb 8.

Robust U.S. Economic Fundamentals

The U.S. GDP grew at 4.2% in the second quarter of 2018, marking its highest gain since the third quarter of 2014 and the third-best growth rate since the Great Recession of 2008-2009. The labor market added 201,000 jobs in August.

Unemployment rate remains at 3.9%, its 18-year low. Average hourly wage rate increased 0.4% in August. Moreover, in August, wages grew 2.9% on an annualized basis, reflecting its highest level since June 2009.

Strong Consumer and Business Confidence

The Conference Board has reported that its U.S. consumer confidence index for the month of August has jumped to 133.4, marking its highest reading since October 2000.

The ISM reported that the U.S. manufacturing index for the month of August was pegged at 61.3, its highest since May 2004. Notably, consumer spending and manufacturing sector accounts for about 70% and 12% of U.S. economic activity, respectively.

Healthy Earnings Data

U.S. corporates earned record high profits in the first two quarters of 2018. In the first quarter, total earnings of S&P 500 companies are up 24.7% on 8.7% higher revenues. In the second quarter, total earnings of S&P 500 companies are up 25.2% on 8.7% higher revenues. For the third quarter, total earnings of S&P 500 companies are likely to be up by 17.6% on 7.3% higher revenues. (Read More: Q3 Earnings Season Gets Underway)

Our Picks

Stock market momentum has remained largely unhindered despite volatility. Massive tax cuts, business-friendly policies and steady economic activities resulted in robust earnings results.

At this stage, we narrowed down our search to five stocks within the Dow 30, S&P 500 and Nasdaq Composite, each having a Zacks Rank #1 (Strong Buy) and strong growth potential.

Caterpillar Inc. CAT: The stock provided a positive earnings surprise of 31.8% in the trailing four quarters. The company has expected earnings growth of 69.3% for current year. The Zacks Consensus Estimate for the current year has improved by 8.4% over the last 60 days.

Apple Inc. AAPL: The stock provided a positive earnings surprise of 5.5% in the trailing four quarters. The company has expected earnings growth of 27.7% for current year. The Zacks Consensus Estimate for the current year has improved by 2.8% over the last 60 days.

NetApp Inc. NTAP: The stock provided a positive earnings surprise of 15.3% in the trailing four quarters. The company has expected earnings growth of 27.4% for current year. The Zacks Consensus Estimate for the current year has improved by 9.4% over the last 60 days.

PACCAR Inc. PCAR: The stock provided a positive earnings surprise of 8% in the trailing four quarters. The company has expected earnings growth of 41.6% for current year. The Zacks Consensus Estimate for the current year has improved by 6% over the last 60 days.

Illumina Inc. ILMN: The stock provided a positive earnings surprise of 25.2% in the trailing four quarters. The company has expected earnings growth of 36.5% for current year. The Zacks Consensus Estimate for the current year has improved by 11.9% over the last 60 days.

NetApp, Inc. (NTAP): Free Stock Analysis Report

PACCAR Inc. (PCAR): Free Stock Analysis Report

Apple Inc. (AAPL): Free Stock Analysis Report

Caterpillar Inc. (CAT): Free Stock Analysis Report

Illumina, Inc. (ILMN): Free Stock Analysis Report

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