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Solid Earnings and Economic Data Driving Markets: 5 Top Picks

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Wall Street rebounded in the first half of October after a devastating September in which the major stock indexes witnessed the sharpest decline in a decade. October too is known for its fluctuating trading pattern.

Despite this, month to date, the three major stock indexes — the Dow, the S&P 500 and the Nasdaq Composite — have rallied 4.3%, 3.8% and 3.1%, respectively. The mid-cap-centric S&P 400 Index has advanced 4.1%. The small-cap-specific Russell 2000 and the S&P 600 have gained 2.8% and 2.4%, respectively.

An impressive start to the third-quarter 2021 earnings season and some solid economic data released in October confirmed the unhindered recovery of the U.S. economy amid prolonged supply-chain disruptions and labor shortage.

Solid Economic Data

Several economists and financial experts have raised their eyebrows regarding the continuation of U.S. recovery after nonfarm payrolls measurably failed to meet consensus estimates in two consecutive months of August and September. Despite this, the unemployment rate dropped sharply to 4.8% in September from 5.2% in August.

However, weekly jobless claims stayed at the low-end of pandemic era over the last three months. Initial jobless claims came in at 293,000 for the week ending Oct 9. This is the best level since Mar 14, 2020. For the first time the metric has fallen below 300,000 since the early days of the Covid-19 outbreak. Moreover, continuing claims declined by 134,000 to 2.59 million, marking another pandemic-era low.

The Institute of Supply Management reported that both manufacturing and services PMIs showed exceptional results in September. Robust data for both manufacturing and services sectors will eventually lead to strong economic growth. Notably, the services sector accounts for 70% of the U.S. GDP while the manufacturing sector commands around 12% of economic activities.

Retail sales in September rose 0.7% in contrast to the consensus estimate of a decline of 0.1%. Moreover, the data for August was revised upward to 0.9% from 0.7% reported earlier. Year over year, retail sales climbed 13.9% in September.

Core retail (excluding auto) sales in September rose 0.8%, beating the consensus estimate of 0.5%. Moreover, the data for August was revised upward to 2% from 1.8% reported earlier. Year over year, core retail sales jumped 15.6% in September.

Retail sales rose steadily despite the termination of the weekly unemployment benefit on Sep 6. This is important since retail sales consist of a major part of consumer spending, the largest driver of the U.S. economy. A sharp decline in the Delta variant cases of the COVID-19 infection was the main reason for strong retail sales data.

Robust Start to Q3 Earnings Season

As of Oct 15, 41 S&P 500 companies reported third-quarter results. Total earnings of these companies are up 40.4% year over year on 13.4% higher revenues with 85.4% beating EPS estimates and 70.7% surpassing revenue estimates.

Total third-quarter earnings of the market's benchmark — the S&P 500 Index — are projected to jump 29.4% from the same period last year on 14.1% higher revenues, following 95% year-over-year earnings growth on 25.3% higher revenues in the second quarter and 49.3% year-over-year earnings growth on 10.3% higher revenues in first-quarter 2021. (Read More: Into the Heart of Q3 Earnings Season)

The first two quarters of this year were favorably impacted since the corresponding quarters of last year were affected by the pandemic-led lockdowns and restrictions. Nevertheless, the U.S. economy started reopening partially albeit at a very slow pace since the third quarter of 2020. Notwithstanding favorable comparisons with last year, third-quarter 2021 earnings estimates reflect genuine growth, climbing 20% from the pre-pandemic third-quarter 2019.

Our Top Picks

We have narrowed down our search to five U.S. corporate behemoths (market capital > $100 billion) as these companies have a well-established business model, a strong financial position and a globally acclaimed brand value.

These companies will report third-quarter 2021 earnings results this month. Each of our picks carries either a Zacks Rank#1 (Strong Buy) or 2 (Buy) and a positive Earnings ESP. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Our research shows that for stocks with the combination of a Zacks Rank #3 (Hold) or better and a positive Earnings ESP, the chance of an earnings beat is as high as 70%. These stocks are anticipated to appreciate after earnings releases. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The chart below shows the price performance of our five picks in the last quarter.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

NextEra Energy Inc. NEE generates, transmits, distributes, and sells electric power to retail and wholesale customers in North America through its wind, solar, nuclear and natural gas-fired facilities. It has a well chalked-out $60-billion capital investment plan, which will strengthen infrastructure and add more clean power generation assets to its portfolio.

Despite the pandemic, NextEra Energy through a solid execution of organic projects, expansion of natural gas pipelines and strategic acquisitions is on course to achieve long-term growth objectives. It currently has many renewable projects in its backlog.

This Zacks Rank #2 company has an Earnings ESP of +0.70%. It has an expected earnings growth rate of 9.1% for the current year. It recorded earnings surprises in the last four reported quarters, with an average beat of 5.2%. The company is set to release earnings results on Oct 20, before the opening bell.

Tesla Inc. TSLA has acquired a substantial market share within the electric car segment. Increasing Model 3 delivery, which forms a major chunk of the company’s overall deliveries, is aiding its top line. Along with Model 3, Model Y is contributing to its revenues.

In addition to increasing automotive revenues, Tesla’s energy generation and storage revenues boost its earnings prospects. The automaker said that its overall deliveries surged 20% in the third quarter from its previous record in the second quarter, marking the sixth consecutive quarter-on-quarter gain.

This Zacks Rank #1 company has an Earnings ESP of +15.68%. It has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved 4.1% over the last 30 days. It recorded earnings surprises in the last four reported quarters, with an average beat of 26.5%. The company is set to release earnings results on Oct 20, after the closing bell.

Advanced Micro Devices Inc. AMD is riding on robust performance from the Computing and Graphics, and Enterprise Embedded and Semi-Custom segments. It is benefiting from strong sales of its Ryzen and EPYC server processors, owing to the increasing proliferation of AI and Machine Learning in industries like cloud gaming and the supercomputing domain.

Moreover, the growing clout of 7-nanometer products in the data center vertical, driven by work-from-home and online learning trends, is a key catalyst. Management raised its 2021 guidance for revenues and gross margin on the back of strong growth across all businesses.

This Zacks Rank #2 company has an Earnings ESP of +2.31%. It has an expected earnings growth rate of 94.6% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.4% over the last 7 days. It recorded earnings surprises in the last four reported quarters, with an average beat of 14.9%. The company is set to release earnings results on Oct 26, after the closing bell.

Alphabet Inc. GOOGL has been showing increased appetite in the Home Assistant space. The company is focused on innovation, launching products and services for multiple industries. Alphabet's robust cloud division is aiding substantial revenue growth.

Moreover, expanding data centers will continue to bolster its presence in the cloud space. Further, major updates in its search segment are enhancing the search results. Additionally, Google’s mobile search is gaining solid momentum. Further, strong focus on innovation of AI techniques and the home automation space should aid business growth in the long term. Also, its deepening focus on the wearables category remains a tailwind.

This Zacks Rank #2 company has an Earnings ESP of +7.71%. It has an expected earnings growth rate of 73.8% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.01% over the last 7 days. It recorded earnings surprises in the last four reported quarters, with an average beat of 47.2%. The company is set to release earnings results on Oct 26, after the closing bell.

Texas Instruments Inc. TXN is benefiting from growth in the personal electronics market owing to the coronavirus-led increasing work-from-home trend. Additionally, solid momentum across the Analog segment owing to robust signal chain and power product lines, is benefiting the top line.

The continued rebound in the automotive market is a tailwind for the company. Solid growth in the industrial market is another positive. Strategic investments in new growth avenues and competitive advantages should also reap results in the long term. Its portfolio of long-lived products and efficient manufacturing strategies are the other tailwinds.

This Zacks Rank #2 company has an Earnings ESP of +9.22%. It has an expected earnings growth rate of 32.7% for the current year. The Zacks Consensus Estimate for current year-earnings improved 0.8% over the last 30 days. It recorded earnings surprises in the last four reported quarters, with an average beat of 20.3%. The company is set to release earnings results on Oct 26, after the closing bell.


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NextEra Energy, Inc. (NEE) : Free Stock Analysis Report

Texas Instruments Incorporated (TXN) : Free Stock Analysis Report

Advanced Micro Devices, Inc. (AMD) : Free Stock Analysis Report

Tesla, Inc. (TSLA) : Free Stock Analysis Report

Alphabet Inc. (GOOGL) : Free Stock Analysis Report

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