Wall Street is heading toward completing a terrible 2022. U.S. stock markets have seen a broad-based decline this year. Among the 11 broad sectors on the market’s benchmark — the S&P 500 Index — all except energy are in the red year to date.
Even the massive growth of the energy sector is primarily due to its low base in the pandemic-ridden last two years, the unending war between Russia and Ukraine and strict production control by OPEC.
Concerns About a Recession in 2023
On Dec 14, the Fed increased interest rates by another 50 basis points. The Fed indicated a continued increase in interest rates at regular intervals through 2023. The latest interest rate hike took the benchmark range to 4.25% to 4.50%, and the Fed projected it to top out at 5.25% before it takes a call on pausing the hikes. This is higher than the September forecast of 4.75%.
Recession fears were further ignited after central banks in Europe also hinted at hiking interest rates through 2023. Both the Bank of England and the European Central Bank slowed down their pace of rate hikes but increased interest rates by 50 basis points. Investors were once again alarmed by this as they believe that the ongoing rate increases could push the economy into a recession.
On Dec 20, global financial markets were completely surprised as the Bank of Japan suddenly widened its target range for the 10-year Japanese government bond yields. The Bank of Japan raised the yield curve control range to 0.5% from the current level of 0.25%, around its target level of 0% yield.
This has sparked widespread selling of bonds and stocks across the global financial markets as the Japanese central bank’s move was perceived by market participants as potentially hawkish. BOJ has so far maintained a 0% benchmark interest rate.
U.S. Stock Markets Seem Oversold
Year to date, the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — have tumbled 9.6%, 19.8% and 32.6%. On Dec 19, these three stock indexes closed at their lowest levels in five weeks.
However, peak inflation seems behind us. A less-than-expected inflation rate in October and November with respect to several measures have clearly indicated this. In fact, economic indicators like a tepid housing sector, declining commodity prices (except food and energy), growing accumulation of inventories on the part of manufacturers and retailers, a gradual slowdown of the ISM manufacturing PMI and retail sales along with a decline in the job openings rate are all pointing to the cooling down of the U.S. economy.
Our Top Picks
At this stage, it will be prudent to invest in beaten down U.S. corporate giants (market capital > $30 billion) for 2022 that have solid potential for 2023. We have selected five such stocks with a favorable Zacks Rank.
These companies have stable business model and stocks are currently available at attractive valuations. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our five picks year to date.
Zacks Investment Research
Image Source: Zacks Investment Research
Fortinet Inc. FTNT is benefiting from rising demand for security and networking products amid the coronavirus crisis as a huge global workforce is working remotely. FTNT is also benefiting from robust growth in Fortinet Security Fabric, cloud and Software-defined Wide Area Network offerings.
Moreover, continued deal wins, especially those of high value, are solid drivers. Higher IT spending on cybersecurity is expected to aid Fortinet in growing faster than the security market. Also, focus on enhancing its unified threat management portfolio through product development and acquisitions is a tailwind for FTNT.
Fortinet has an expected earnings growth rate of 20.6% for next year. The Zacks Consensus Estimate for next-year earnings improved 6.2% over the last 60 days. The stock price of FTNT is currently trading at a 32.1% discount from its 52-week high.
salesforce.com inc. CRM is benefiting from a robust demand environment as customers are undergoing a major digital transformation. The rapid adoption of its cloud-based solutions is driving demand for CRM’s products. CRM’s sustained focus on introducing more aligned products as per customer needs is driving its top-line.
Continued deal wins in the international market are other growth drivers. The acquisition of Slack would position salesforce.com to be a leader in the enterprise team collaboration solution space and better compete with Microsoft’s Teams product. We expect CRM revenues to witness a CAGR of 12.5% through fiscal 2023-2025.
salesforce.com has an expected earnings growth rate of 14.6% for next year (ending January 2024). The Zacks Consensus Estimate for next-year earnings improved 2% over the last 30 days. The stock price of CRM is currently trading at a 50.7% discount from its 52-week high.
Workday Inc.’s WDAY revenue growth continues to be driven by high demand for its HCM and financial management solutions. WDAY’s cloud-based business model and expanding product portfolio have been the primary growth drivers.
Moreover, the growing clout of Workday Prism Analytics and Adaptive Insights business planning cloud offerings holds promise. Based on its expanding product portfolio, we believe that Workday is well positioned to gain from its strong growth prospect.
Workday has an expected earnings growth rate of 32.3% for next year (ending January 2024). The Zacks Consensus Estimate for next-year earnings improved 0.2% over the last seven days. The stock price of WDAY is currently trading at a 38.7% discount from its 52-week high.
Wells Fargo & Co. WFC has benefited from rising rates and solid average loan growth. Progress on efficiency initiatives propelled expense control and savings, which might support WFC’s bottom line in the upcoming period. Strength in the deposit balance would aid the bank’s liquidity position. WFC’s solid liquidity position will help navigate economic uncertainty and supports capital deployment moves.
Wells Fargo has an expected earnings growth rate of 34.7% for next year. The Zacks Consensus Estimate for next-year earnings improved 0.2% over the last seven days. The stock price of WFC is currently trading at a 32% discount from its 52-week high.
Southern Copper Corp. SCCO expects production to recover in 2023 and reach 971,000 tons with Peruvian production coming back on track and new production at Pilares, El Pilar and Buenavista. SCCO’s strict cost control measures will help offset the impact of inflated fuel, labor and operating costs.
Even though copper prices have declined lately, SCCO will be supported by growth in public infrastructure investment in the United States and global initiatives to address climate change. This would support Southern Copper’s top-line performance. Backed by industry-leading copper reserves as well as growth investments, SCCO is well poised to continue delivering solid results.
Southern Copper has an expected earnings growth rate of 0.2% for next year. The Zacks Consensus Estimate for next-year earnings improved 20.2% over the last 30 days. The stock price of SCCO is currently trading at a 23.8% discount from its 52-week high.
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