Here are some stocks to watch.
There’s no question 2017 has been an exceptional year for U.S. stocks, but investors are already turning their attention to what 2018 will bring. Argus Research Group CEO John Eade recently compiled 10 stock market themes investors should be watching in 2018, including individual stock recommendations for each theme. The remarkable bull market is approaching its 10th year, a point at which Eade says investors should typically begin worrying about slowing profit growth, stretched valuations and rising interest rates. However, despite the potential headwinds, Eade says the following 10 themes will drive stock prices even higher in 2018.
Opportunities for income investors.
Most experts expect interest rates to continue to rise in 2018, putting pressure on dividend-paying stocks to compete with fixed-income assets, such as long-term Treasuries. In addition, many U.S. companies will be flush with cash thanks to a booming economy and corporate tax cuts. Some companies have already committed to using the extra cash from tax cuts to increase capital return programs. Eade says investors should focus on companies with strong balance sheets and track records of growing dividends by at least 10 percent annually.
Argus recommends: Home Depot (NYSE: HD)
Tax cuts are a win for business.
Eade expects companies and individuals to partially spend and partially save the extra cash they get from tax cuts in 2018. The Tax Foundation estimates tax reform could boost U.S. GDP by 3.7 percent, increase wages by 2.9 percent and create an additional 925,000 full-time jobs. Argus estimates most large U.S. companies will get a 5 to 8 percent direct boost to earnings per share thanks to the tax cut. Small-cap stocks and companies with entirely domestic businesses are best-positioned to benefit.
Argus recommends: Lowe’s Companies (LOW), Costco Wholesale Corp. (COST)
Consumers are confident.
A booming economy, historically low unemployment rates and an improving housing market all have U.S. consumers feeling pretty good about their current financial situation. According to Eade, U.S. consumer confidence is at its highest point in 12 years, and Americans will likely continue to spend liberally in the year ahead. Companies who sell discretionary products and services, including luxury products, electronics, entertainment, collectibles and travel, could be big winners in 2018. High-end restaurants and clothing retailers could also benefit from confident American consumers.
Argus recommends: Walt Disney Co. (DIS), Wynn Resorts, Limited (WYNN)
Interest rates will play a role.
All indications suggest that the Federal Reserve is finally on track for steady interest rate hikes in coming quarters. Rising interest rates will ultimately cut into corporate profit margins, but there are plenty of companies that will benefit from higher rates, at least initially. Banks, for example, should be able to boost their net interest margins. Insurance companies should also be able to generate higher returns on investment portfolios. Finally, higher inflation triggered by rising interest rates should also help support commodity prices.
Argus recommends: BB&T Corp. (BBT), Metlife (MET), Chemours Co. (CC)
The oil market is recovering.
Investors have been hearing about a recovery in the global oil market for years now, but Eade says emerging market growth coupled with an extension of OPEC production cuts could finally help rebalance the oil market in 2018. Argus estimates emerging market economies, including China and India, are expected to grow by 4.8 percent in 2018. Eade says emerging market demand for oil should keep the price of WTI crude oil at an average price of $58 per barrel in 2018, up from $52 per barrel in 2017.
Argus recommends: Exxon Mobil Corp. (XOM), Schlumberger Limited (SLB)
AI will be a game-changer.
Eade says deep learning, machine learning, artificial intelligence and augmented reality are all part of the next era of business solutions. The internet of things is creating massive quantities of data. Opportunities for investors range from the software companies creating AI algorithms to the cloud storage companies storing the data to the semiconductor companies providing the processing power. Artificial intelligence is even changing the auto industry, as manufacturers race to get the first autonomous vehicles to market.
Argus recommends: International Business Machines Corp. (IBM), Nvidia Corp. (NVDA), Amazon.com (AMZN)
Medical technology companies have more opportunities.
While many big pharmaceutical and biotech stocks lagged the market in 2017 due to concerns about regulation and pricing, “med-tech” companies have exposure to the booming health care market and don’t have to deal with the same types of headwinds as pharma companies. Eade says med-tech companies also have more of an opportunity for international expansion and are protected from the type of generic competition that takes a bite out of drug company profits. Health care services companies are particularly useful as the industry gets larger and more complicated.
Argus recommends: Thermo Fisher Scientific (TMO), Abbott Laboratories (ABT)
Millennials are showing more strength.
Millennials are now the largest demographic of American consumers, and Eade says their purchasing power is still on the upswing. As this generation of young American professionals continues to pay down its massive debt burden, millennials will have more discretionary cash to spend. Eade says millennials are passionate about healthy living, modern lifestyle, entrepreneurial spirit, technology and environmental and social causes. Advertisers are exploring new ways to reach and market to millennials, including mobile and social media marketing.
Argus recommends: Tesla (TSLA), GrubHub (GRUB), Paypal Holdings (PYPL)
Impact investing is more popular.
Socially responsible investing has been around since the 1980s, but these types of portfolios and funds have historically underperformed. However, more major companies have begun taking a stand on causes such as climate change, gender equality, and tackling global hunger and poverty, making socially conscious investing more mainstream. Goldman Sachs now manages more than $10.5 billion in assets that meet strict environmental, social and governance criteria.
Argus recommends: Johnson & Johnson (JNJ), AT&T (T), Cisco Systems (CSCO)
Innovation rules the day.
The digital age has ushered in some of the most complex problems in human history, and the companies that act creatively and aggressively to solve these problems will likely continue to be top performers in the market. Investors often think of the FAANG stocks and other technology leaders first when they consider innovative companies, but Eade says companies can subtly innovate by improving margins and profitability as well.
Argus recommends: Facebook (FB), Southwest Airlines (LUV), 3M (MMM)
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10 Investing Themes to Remember for 2018 originally appeared on usnews.com
