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Fed Raises Economic Outlook: 5 Great Top-Ranked Stock Picks

Zacks

On Jun 13, Fed Chairman Jerome raised the benchmark lending rate by a quarter point following the Federal Open Market Committee’s (FOMC) latest policy meeting. Notably, this was the second rate hike this year. Further, the central bank has raised the economic outlook for 2018 and provided robust estimates of several key economic metrics.

At present, the U.S. economy is on strong footing. A set of stimulative policies led by the massive tax cuts in December 2017, a robust labor market operating near full employment and accommodative financial conditions have improved consumer and business confidence. Consequently, the blooming economic picture persuaded the central bank to raise the benchmark lending rate from 1.75% to 2%.

At this stage, it will be a prudent move to invest in stocks exhibiting strong earnings momentum and carrying a favorable Zacks Rank.

Fed Raises GDP Estimates

The Fed raised forecast for 2018 GDP growth from 2.7% in March to 2.8%. However, GDP estimate for 2019 and 2020 remain unchanged at 2.4% and 2%, respectively.

The primary catalyst behind these positive revisions is obviously the direct impact of the tax cuts. The corporate tax rate was recently lowered from 35% to 21%. Moreover, repatriation of income will be taxed 8% to 15.5%, instead of the current 35%.

Robust Labor Market

On Jun 1, the Department of Labor reported that the U.S. economy added 223,000 jobs in May, exceeding the consensus estimate of 190,000. The unemployment rate declined from 3.9% in April to 3.8% in May, its lowest in 18 years. The decline in the unemployment rate indicates the extent to which the labor market has tightened.

The Fed’s latest projection for the labor market has added a little extra sweetness to the economic scenario. The central bank has reduced its 2018 unemployment rate estimate to 3.6% from 3.8% in March. Unemployment rate is likely to remain stable at 3.5% in 2019 and 2020 better than the central bank’s March projection of 3.6% for both years. This indicates that the U.S. labor market will maintain near full employment levels over 2018-2020.

Inflation Under Control

The Fed has increased its 2018 PCE (personal consumption expenditure) inflation projection from 1.9% in March to 2.1%. However, the core PCE inflation (excluding food and energy) –the key inflation measurement tool and the central bank’s preferred inflation barometer – was up slightly to 2% from 1.9% in March.

Jerome Powell stated that the Fed was comfortable with the return of once-dormant inflation and will not adhere to raising rates in haste as it may result in recession by unnaturally inflating asset valuations. Latest Labor Department data revealed that wages have increased 2.6% year over year in April. However, April’s reading was lower than the previous 12-month period wage growth rate of 2.7%.

Our Top Picks

Solid macro-economic fundamentals, government’s tax reform and deregulation proposals along with sustained strong earnings performance are major tailwinds for the U.S. economy. Such factors are unlikely to disappear in the near term. At this stage, investment in stocks with strong earnings momentum will be lucrative. However, picking winning stocks can be a difficult task.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.

We have narrowed down our search to five stocks, each of which has a Zacks Rank #1 (Strong Buy) and a VGM Score A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Chart below depicts price performance of our five picks in the last three months.

Continental Resources Inc. CLR is a crude-oil concentrated, independent oil and natural gas exploration as well as production company. The company has expected earnings growth of 494.1% for current year. The Zacks Consensus Estimate for the current year has improved by 12.6% over the last 30 days.

Parsley Energy Inc. PE is an independent oil and natural gas company. It is focused on the acquisition, development, and exploitation of unconventional oil and natural gas reserves in the Permian Basin. The company has expected earnings growth of 127.5% for current year. The Zacks Consensus Estimate for the current year has improved by 13.8% over the last 30 days.

The Progressive Corp. PGR provides personal and commercial property-casualty insurance, and other specialty property-casualty insurance and related services primarily in the United States. The company has expected earnings growth of 54.8% for current year. The Zacks Consensus Estimate for the current year has improved by 2.3% over the last 30 days.

Murphy oil Corp. MUR is an independent exploration and production company with a strong, oil-weighted portfolio of global offshore and onshore assets. The company has expected earnings growth of 1,184.6% for current year. The Zacks Consensus Estimate for the current year has improved by 2.9% over the last 30 days.

Vishay Intertechnology Inc. VSH is one of the world's largest manufacturers of discrete semiconductors and passive electronic components. The company has expected earnings growth of 24.5% for current year. The Zacks Consensus Estimate for the current year has improved by 11.5% over the last 30 days.

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