On Jan 22, the Dow Index achieved a milestone, crossing the technically crucial 38,000 level for the first time in its history. The 30-stock index closed reached 38,109.20 before finishing at 38,001.81. Last week, the S&P 500 Index — better known as Wall Street’s benchmark — ended at its all-time highs both on intraday and closing basis.
Dow in 2022 and 2023 At a Glance
Wall Street had a highly disappointing 2022 as the inflation rate had reached a record high and the Fed had initiated an aggressive interest rate rise policy to combat elevated price levels. Major stock indexes suffered a huge blow in 2022.
However, the Dow suffered the least. A higher interest rate is detrimental to growth stocks like consumer discretionary and technology. In contrast to the Nasdaq Composite and the S&P 500 indexes, the 30-stock Dow is more inclined to cyclical stocks than growth stocks.
Consequently, in 2022, the Dow fell 8.8% year over year, while the S&P 500 and the Nasdaq Composite plummeted 19.4% and 33.1%, respectively. However, the situation took a turn in 2023.
Several economic data have pointed out that the U.S. economy has been cooling since the beginning of 2023. The inflation rate has dropped to a good extent despite remaining elevated in absolute terms. Consequently, the Fed first reduced the magnitude of interest rate hike and finally stopped the rate hike in July 2023.
Last year, a lower rate hike enabled growth sectors like technology, communication services and consumer discretionary to thrive. Consequently, the tech-heavy Nasdaq Composite jumped 43.4%. The broad-market S&P 500 Index also saw an impressive rally of 23.9%. However, the Dow was up just 13.7%.
Dow Set to Maintain Pace in 2024
Despite initial volatility concerning the time of the first reduction in interest rate by the Fed. U.S. stock markets are in positive territory year to date. The Dow, the S&P 500 and the Nasdaq Composite are up — 0.8%, 1.7% and 2.3%, respectively.
The Fed is set to initiate an interest rate reduction in 2024. A lower interest rate regime should be beneficial for stock markets. A low risk-free interest rate will reduce the discount rate, thereby increasing the net present value of investment in equities.
At present, cyclical stocks are undervalued relative to growth stocks. Technically, at its current level of 37,806.39, the Dow — popularly known as the blue-chip Index of Wall Street — is well above its 50-day and 200-day moving averages of 36,566.89 and 34,672.34, respectively.
The 50-day moving average line is generally recognized as a short-term trendsetter in financial literature, while the 200-day moving average is considered a long-term trend setter.
Historically it has been noticed in the technical analysis space that whenever the 50-day moving average line surges ahead of the 200-day moving average line, a long-term uptrend for the asset (in this case the Dow Index) becomes a strong possibility.
Our Top Picks
We have narrowed our search to five Dow stocks that have strong earnings growth potential for 2024. These stocks have seen positive earnings estimate revisions in the last 30 days. These companies are regular dividend payers which will act as earnings streams during the market’s downturn. Finally, 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 in the past three months.
Image Source: Zacks Investment Research
Apple Inc. (AAPL - Free Report) is benefiting from strong demand for iPhone. AAPL expects iPhone’s year-over-year revenues to grow on an absolute basis in first-quarter fiscal 2024. Revenues for Mac are expected to significantly accelerate compared with the fourth-quarter fiscal 2023 reported figure.
AAPL expects the year-over-year revenue growth for both iPad and Wearables, Home and Accessories to decelerate significantly from the September quarter due to a different timing of product launches. For the Services segment, AAPL expects average revenues per week to grow at a similar strong double-digit rate as it did during the September quarter. The expanding content portfolio of Apple TV+ aids subscriber growth.
Apple has an expected revenue and earnings growth rate of 2.7% and 7.7%, respectively, for the current year (ending September 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.5% over the last seven days. AAPL has a current dividend yield of 0.50%.
Microsoft Corp. (MSFT - Free Report) has gained from strong Intelligent Cloud and Productivity and Business Processes revenues. Intelligent Cloud revenues were driven by growth in Azure and other cloud services. Productivity and Business Processes revenues of MSFT rose due to the strong adoption of Office 365 Commercial solutions.
Continued momentum in small and medium businesses, frontline worker offerings and a gain in revenue per user drove the top line of MSFT. Steady growth in Dynamics products and cloud services aided LinkedIn revenues.
Microsoft has an expected revenue and earnings growth rate of 14.4% and 13.6%, respectively, for the current year (ending June 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last 30 days. MSFT has a current dividend yield of 0.75%.
The Travelers Companies Inc. (TRV - Free Report) boasts a strong market presence in auto, homeowners’ insurance and commercial U.S. property-casualty insurance with solid inorganic growth. A high retention rate, a rise in new business and positive renewal premium change bode well.
TRV’s commercial businesses should perform well owing to market stability. TRV remains optimistic about the personal line of business, given growth in the auto and homeowners business. TRV expects fixed-income net investment income to be around $615 million after tax for the fourth quarter.
The Travelers Companies has an expected revenue and earnings growth rate of 11.6% and 29.2%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.7% over the last seven days. TRV has a current dividend yield of 1.89%.
American Express Co. (AXP - Free Report) has benefited from several growth initiatives, such as launching new products, reaching new agreements and forging alliances. Consumer spending on T&E, which carry higher margins for AXP, is advancing well.
AXP’s balance sheet looks strong with manageable debt and ample cash. Solid cash-generation abilities enable the pursuit of business investments and prudent deployment of capital via buybacks and higher dividends.
American Express has an expected revenue and earnings growth rate of 9.5% and 10.5%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.8% over the last seven days. AXP has a current dividend yield of 1.31%.
International Business Machines Corp. (IBM - Free Report) is likely to benefit from the rising demand of its hybrid cloud and AI solutions. The buyout of Software AG’s iPaaS (integration platform-as-a-service) business is expected to accelerate watsonx data ingestion capabilities and enrich customers with additional API management features.
IBM’s collaboration with SAP to tap generative AI technology within the retail industry will likely generate incremental revenues. Strong free cash flow provides IBM the financial flexibility required for strategic investments in the evolving business environment.
International Business Machines has an expected revenue and earnings growth rate of 2.9% and 3.5%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last seven days. IBM has a current dividend yield of 3.87%.
As a financial analyst and market enthusiast, my deep involvement in the dynamics of the stock market, particularly with indices like the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite, along with a close tracking of the Federal Reserve's monetary policies, equips me to dissect and interpret market trends and their underlying causes.
In the article you've shared, several key concepts and phenomena are discussed:
Dow Jones Industrial Average (DJIA): The Dow is a stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States. It's a price-weighted index, meaning companies with higher stock prices have a greater impact on the index's performance.
S&P 500 Index: This index is more representative of the U.S. market as it includes 500 of the largest companies. Unlike the Dow, it's a market-capitalization-weighted index, meaning companies with higher market caps have a greater impact.
Nasdaq Composite: This index is heavily weighted towards technology stocks, representing a range of industries, but primarily focused on tech and biotech. Like the S&P 500, it is market-capitalization-weighted.
Interest Rates and the Federal Reserve: The Fed's policy on interest rates significantly affects the stock market. Higher interest rates can lead to higher borrowing costs and reduced profitability for companies, often negatively impacting stock prices. Conversely, lower rates can stimulate investment in equities as they make borrowing cheaper.
Cyclical vs. Growth Stocks: Cyclical stocks, often represented in the Dow, are those that tend to follow the economic cycle of expansion and contraction, such as financial and industrial companies. Growth stocks, common in the Nasdaq, are those of companies expected to grow at an above-average rate compared to other companies, like tech firms.
2022 Market Performance: The article notes that the Dow fell less compared to the S&P 500 and Nasdaq due to its composition of more cyclical stocks, which were less impacted by the Fed's interest rate hikes.
2023 Market Shift: With the cooling of the U.S. economy and the reduction in interest rate hikes, there was a shift in performance. The tech-heavy Nasdaq surged due to the more favorable conditions for growth stocks.
2024 Outlook and Technical Analysis: The article suggests a positive outlook for 2024, with the Dow surpassing key moving averages - short-term (50-day) and long-term (200-day). The crossing of the 50-day moving average above the 200-day average is a bullish signal in technical analysis.
Stock Picks and Financial Metrics: The article concludes with specific stock recommendations from the Dow, focusing on aspects like earnings growth potential, recent positive earnings estimate revisions, dividend yields, and current financial performance.
Understanding these concepts and their interplay provides a comprehensive view of the market dynamics described in the article. My analysis is grounded in both the theoretical frameworks of market economics and practical experience observing and interpreting market trends and policy shifts.