With the Dow breezing past the 25,000 milestone, President Trump believes even 30,000 is possible. The blue-chip index has relentlessly soared to record highs in the past year and has nearly quadrupled in value from the financial crisis in 2009. Enthusiasm over the Republican-led tax cut, which can boost corporate profits this year, and a series of strong economic reports helped the index move north by leaps and bounds.
Given the positives, investing in blue-chip stocks seems tempting at the moment. Such companies are slated to gain further in the near term as they have large market capitalization, strong balance sheets and solid cash flow.
Dow Bursts through the 25,000 Point Mark
The Dow kicked off 2018 with sizeable gains. The 30-stock index topped the coveted 25,000 mark and notched its biggest weekly gain since the period ended Dec 1, 2017. It just took 35 calendar days for the Dow to jump from 24,000 to 25,000, its fastest 1,000-point climb.
The Dow has now extended its last year’s gain of 25%, helping the Bull Run that began in 2009, to post its second-longest run in Wall Street history. In fact, the index hit 71 record closing highs last year, the highest since the blue-chip index’s creation in 1896.
Several gurus, who until recently called for a stock market correction, are now turning super bullish. They are predicting the Dow to hit 30,000 in the near term. Also, Trump said, “I guess our new number is 30,000.” He has already taken credit for Dow 25,000 and has become the first ever President in the history to have spoken so much about the U.S. equity market.
Is Dow 30,000 Possible in Trump’s First Term?
The recent tax code overhaul and a strengthening economy could certainly help the Dow breeze past 30,000 and help American blue-chip companies make more money.
Republican-Backed Tax Package
Republicans efficaciously defied opposition from Democrats to pass the biggest overhaul of the U.S. tax code that will trim corporate taxes and provide temporary tax relief to both wealthy and middle-class Americans. The corporate tax rate will be lowered from 35% to 21% and will be implemented this year, instead of being delayed till 2019. At the same time, any income brought back from overseas will be taxed 8-15.5%, instead of the current 35%.
A one-time low tax rate on foreign profits will help blue-chips bring funds held overseas back to the United States. Bringing back overseas cash pile will help such companies carry out a combination of share buybacks, dividend payments and M&A activities. They also face a high tax burden, which makes them big gainers when tax rates go down. The tax bill, in the meanwhile, will provide temporary tax relief to both wealthy and middle-class Americans. This in turn will increase discretionary income that may give a boost to the demand for consumer goods and services (read more: GOP Passes Landmark Tax Bill: Best & Worst for Stocks).
Strong Economic Growth
U.S. manufacturing surged in December, touching the second-highest reading of 2017. Increase in sales from housing demand post-hurricane and a general uptick in the economy gave a boost to manufacturing activities. Wells Fargo & Company WFC, a diversified financial services company has predicted that the U.S. economy will expand an average 2.5% each quarter this year and the next.
Economic recovery worldwide also gave a boost to profitability of American blue-chip companies, reduced the jobless rate to 4.1% and lifted consumer confidence to a 17-year high set in November. Lynn Franco, director of economic indicators at the Conference Board, added that “consumers’ expectations remain at historically strong levels, suggesting economic growth will continue well into 2018.”
Some pessimists may argue that job addition numbers last month came in below expectations. However, the average over the past few months continues to show that the labor market remains strong, while workers’ pay has also increased 2.5% from Dec 2016 to Dec 2017, up from 2.4% in the prior month. The National Employment Law Project, in fact, showed that minimum wage is poised to increase in 18 states and around 20 cities in the United States. This will result in inching employees wage closer to $15 an hour, which is known as “living wage.”
5 Blue-Chip Stocks to Ride Dow’s Stellar Run
Thanks to the aforesaid bullish factors, there has been a particularly sharp run up in the 120-year-old index of 30 stocks. This calls for investing in some fundamentally sound blue-chip companies which can make the most of this bullish run. We have, thus, zeroed in on five such stocks that flaunt a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
3M Company MMM operates as a diversified technology company worldwide. The Zacks Consensus Estimate for its current-year earnings has increased 0.4% in the last 60 days. 3M has returned 31.8% in 2017. Moreover, its expected growth rate for the current year is 11.4%, better than the industry’s expected gain of 7.8%.
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Caterpillar Inc. CAT manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for heavy and general construction. The Zacks Consensus Estimate for its current-year earnings has advanced 0.9% in the last 60 days. Caterpillar has returned 69.9% in 2017. Also, its expected growth rate for the current year is 88.9%, way higher than the industry’s expected gain of 34%.
McDonald's Corporation MCD operates and franchises McDonald’s restaurants in the United States and internationally. The Zacks Consensus Estimate for its current-year earnings has increased 0.3% in the last 90 days. McDonald's has returned 41.4% in 2017. Moreover, its expected growth rate for the current year is 14.6%, more than the industry’s expected meagre gain of 0.4%.
The Procter & Gamble Company PG provides branded consumer packaged goods to consumers in the United States and internationally. The Zacks Consensus Estimate for its current-year earnings has advanced 0.2% in the last 60 days. Procter & Gamble has yielded a return of 9.3% in 2017. Also, the company that is part of the Soap and Cleaning Materials industry is expected to give a solid return of 6.6%.
Microsoft Corporation MSFT develops, licenses, and supports software products, services, and devices worldwide. The Zacks Consensus Estimate for its current-year earnings has risen 5.6% in the last 90 days. Microsoft has returned 37.7% in 2017. Moreover, the company that is part of the Computer – Software industry is projected to give a stable return of 2.1%.
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