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S&P 500 at All-Time High on Hopes of Trade Progress & Rate Cut

Nilanjan Banerjee

Washington and Beijing are looking to settle the tariff war that has been roiling the global economy for more than a year. Notably, the phase-one negotiation is progressing well and analysts are expecting the countries to resolve more knotty issues in phase two.

In addition to trade optimism, hopes for a third Fed rate cut since July have propelled stocks higher. While the S&P 500 recently hit an all-time high mark, Nasdaq closed just below its record.

Promising Progress on Phase-One Trade Deal

The United States and China have made promising progress so far on the phase-one trade agreement and the big economies are expecting to nail down the deal next month. After a high-level telephonic conversation on Friday, the countries stated that they are very close to finalizing some sections of the accord.

Per the consensus reached by both the sides, Washington will be importing cooked poultry and catfish products from Beijing, while the world’s second-largest economy will remove restrictions on American poultry, said the Commerce Ministry of China.

Market is not expecting any hindrance for the phase one deal. This is because China has already commenced the purchase of more agricultural products from the United States, courtesy of the countries’ initial step, taken on Oct 11, to dial down hostilities on the trade front. Precisely, China had agreed to purchase $40 billion to $50 billion of agricultural products from America and open up its financial markets to encourage foreign investments. In exchange, the United States had foregone its planned tariff increase, which was scheduled on Oct 15, on $250 billion in Chinese goods.

Possible October Rate Cut

Apart from promising progress in the phase one trade deal, the Federal Reserve’ possible rate cut in Oct 29-30 meeting is also aiding the Wall Street. Earlier in October, the market witnessed a series of weak economic data which investors believe will convince the Fed to lower its benchmark rate for the third time in 2019. Importantly, markets are betting heavily on a federal funds rate cut of 25 basis points this time around so that the benchmark rate will lie in the band of 1.50% to 1.75%, per CME's FedWatch tool.

It is to be noted that while lending growth of the country’s biggest banks like Bank of America Corporation BAC and Citigroup Inc C has slowed in third-quarter 2019 as compared to the prior quarter, JPMorgan Chase & Co JPM has witnessed a drop in lending. Thus, the Federal Reserve's recent interest rate cuts, aimed at encouraging consumers to spend more by borrowing, unfortunately was a failed attempt to boost the economy.

Moreover, retail sales in the United States declined 0.3% in September from August. This marked the first monthly decline since February, paving the way for another rate cut by the Fed.

Stocks to Make the Most

It is a good time to invest in trade-sensitive tech stocks since investors are betting high on a phase-one trade deal next month. Moreover, if the Fed cuts rates, it will favor utility firms since their businesses require significant debt financing. In order to deliver gas, electricity and water, utility companies are required to build power plants and maintain massive infrastructure.

We have shortlisted four such stocks carrying a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Santa Clara, CA-based Advanced Micro Devices Inc. AMD is a leading semiconductor company with significant China revenue exposure. In 2019, the Zacks #2 Ranked company is likely to see promising earnings growth of 37%.

Ambarella Inc AMBA, headquartered in Santa Clara, CA, is a semiconductor design company with considerable sales exposure to China. Over the past 60 days, the Zacks Rank #2 company has seen significant positive earnings estimate revisions for fiscal 2020.

NRG Energy, Inc. NRG, headquartered in Princeton, NJ, is involved in generating electricity to serve commercial and residential customers. The company, with a Zacks Rank of 1, is likely to see earnings growth of 63% and 40% in 2019 and 2020, respectively.

Based in New Orleans, LA, Entergy Corporation ETR is mainly engaged in generating and distributing electricity. The company, with a Zacks Rank of 2, has an average positive earnings surprise of 10.8% for the past four quarters. In the next five years, the stock is likely to see earnings growth of 7%, marginally outperforming the industry’s 6.7%.

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