Wall Street has a good rally in October after a terrible September. Historically, there have been some major stock market crashes this month. However, this year, it looks like there will be a happy ending in October.

Year to date, the three major stock indexes – the Dow, the S&P 500 and the Nasdaq composite – are up 9.7%, 5.9% and 3.6%. On the other hand, the Dow, the S&P 500 and the Nasdaq Composite – have sunk 13.3%, 20.3% and 30%, respectively, on a year-to-date basis.

Both the S&P 500 and the Nasdaq Composite are in bear market territory. This is why financial experts characterize the ongoing October rally as a bear market rally or a relief rally, like the one we saw from mid-June to mid-August.

Although market participants have yet to be convinced of the bottom, there are some positives to the October rally. Let’s discuss briefly.

Are Markets Trying to Form a Base?

US stock markets have seen large intraday swings over the past month. The Dow has recorded about a 600-700 point intraday swing and the Nasdaq Composite has seen a 300-400 point intraday swing. The S&P 500 registered a 50-60 point intraday swing over the past month. If we consider, pre-market movements index futures, intraday fluctuations of the three indices will be much wider.

This clearly shows that investors are releasing “Sell on the Rise” and “Buy on the Dip” strategies to strengthen their portfolios. Since the market is uncertain about the future interest rate movement and Fed tightening, investors are taking a short-term view and selling stocks to book quick profits. At the same time, markets are no longer reflecting a secular downturn. This means that there is some kind of growing sentiment among investors about its termination.

When such a situation arises, the market seems to have a basis on which to ride the long-term growth. In the US stock markets, this type of situation has been seen in the last month. From here the market can see a sharp rise if there is a minimal positive hint from the Fed.

Other Positive Things

Last week, The Wall Street Journal reported that some Fed officials are skeptical about continuing the central bank’s aggressive rate hike and tighter monetary control. Officials have already begun to signal that they want to slow the pace of rate hikes soon and stop raising rates early next year. They want to reduce the risk of the economy landing hard due to the Fed’s policy interventions.

The Fed has already increased the benchmark lending rate by 3% in 2022. It takes a long time for the cumulative effect of a higher interest rate regime to be felt in the economy. A section of market participants led by Ark Investment Management believes that the central bank should not make decisions on the future course of interest rate movements based on lagging indicators such as non-farm payrolls and inflation rates.

Instead, the Fed should decide on lead indicators such as a decline in commodity prices (except for food and energy), increasing inventory build-up by manufacturers and retailers, a gradual slowdown in the ISM manufacturing PMI and a decline in the job opening rate. All these leading indicators show that the US economy is cooling down.

Stock Selection Process

An upward EPS estimate revision on any stock for the rest of 2022 simply means that the market expects the company to do good business this year. A positive estimate revision in the last 30 days means that the market is thinking positively about the company.

Thus, a positive revision of EPS estimate under increasing inflationary threats highlights a company’s solid business model and strong growth potential. Investors can definitely take a look at these stocks that currently have strong earnings momentum.

We’ve narrowed our search to five large-cap US companies with strong potential for the rest of 2022. These stocks have a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

The chart below shows the price performance of our five picks over the past three months.

Zacks Investment Research

Zacks Investment Research

Image Source: Zacks Investment Research

Williams Companies Inc. WMB operates as an energy infrastructure company primarily in the United States. With demand for US natural gas projected to increase significantly over the long term, WMB appears poised to capitalize on the same due to its impressive portfolio of large-scale, value-creating projects.

In particular, the company’s current development and expansion projects related to Transco’s massive gas transmission system are expected to boost Williams’ growth prospects. Another positive is WMB’s successful deepwater transport business.

Williams Companies has an expected earnings growth rate of 15.4% for the current year. The Zacks Consensus Estimate for current year earnings has improved by 6.1% over the past seven days.

Interactive Brokers Group Inc. IBKR operates as an automated electronic broker worldwide. IBKR specializes in executing and clearing trades in securities, futures, foreign exchange instruments, bonds and mutual funds.

Interactive Brokers Group’s efforts to develop proprietary software (including IBKR Lite), its low level of compensation costs relative to net income and an increase in emerging market customers are likely to continue to help its finances. The acquisition of Folio Investments’ retail unit will strengthen IBKR’s position in the online brokerage space.

Interactive Brokers Group has an expected earnings growth rate of 16.3% for the current year. The Zacks Consensus Estimate for current year earnings has improved by 4.8% over the past seven days.

Incyte Corp. INCY focuses on the discovery, development and commercialization of various therapeutics in the United States. Higher royalty income from LINCY, Jakafi, and other recently approved drug acquisitions continue to increase the company’s momentum.

The expansion of the Jakafi label into additional indications is expected to further drive sales, and the company raised the front end of Jakafi’s net product revenue guidance for the full year.

The recent FDA approval of ruxolitinib cream under the brand name Opzelura has diversified Incyte’s portfolio. The uptake of Pemazyre and other newly approved drugs such as Monjuvi and Tabrecta is positive and should boost sales. The label expansion of these drugs is also positive and will generate incremental sales.

Incyte has an expected earnings growth rate of 13.8% for the current year. The Zacks Consensus Estimate for current year earnings has improved by 0.6% over the past seven days.

Hubbell Inc. HUBB is engaged in the design, manufacture and sale of electrical and electronic products to the commercial, industrial, utility and telecommunications markets. HUBB products include plugs, receptacles, connectors, lighting fixtures, high voltage test and measurement equipment and voice and data signal processing components. Hubbell operates through two segments – Electrical Solutions and Utility Solutions.

HUBB has an expected earnings growth rate of 23.4% for the current year. The Zacks Consensus Estimate for current year earnings has improved by 1% over the past seven days.

Lamb Weston Holdings Inc. LW produces, distributes and markets value-added frozen potato products worldwide. LW’s top line is benefiting from a strong price/mix, as seen in the first quarter of fiscal 2023. Price/mix increased 19%, reflecting gains from pricing actions in core business areas to combat cost inflation inputs, manufacturing and transport.

Lamb Weston’s top and bottom lines increased year-over-year in the quarter. LW saw net sales growth across all three reporting segments. While the macro environment remains volatile, management is on track to deliver results at the high end of the sales and earnings target in fiscal 2023. In addition, Lamb Weston wanted to boost production capacity to drive long-term growth.

Lamb Weston has an expected earnings growth rate of 45.7% for the current year (ending May 2023). The Zacks Consensus Estimate for current year earnings has improved by 8.6% over the past 30 days.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Williams Companies, Inc. The (WMB) : Free Stock Analysis Report

Interactive Brokers Group, Inc. (IBKR) : Free Stock Analysis Report

Incyte Corporation (INCY) : Free Stock Analysis Report

Hubbell Inc (HUBB) : Free Stock Analysis Report

Lamb Weston (LW): Free Stock Analysis Report

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