The Dow Jones rose for the third day in a row on Nov 1, closing a tough October for the blue-chip index. The push for a possible trade deal between the United States and China is helping the Dow Jones gain momentum, while corporate earnings are blowing past expectations on signs of a strengthening economy.
As the Dow Jones continues to scale upward, it will be prudent to invest in stocks listed in the said index. Such companies are slated to gain further in the near term as they are well established and financially sound.
Dow Jones Makes a Solid Comeback
Trade tensions between the United States and China in October raised a lot of concern among investors. After all, tariffs do squeeze corporate profits and hamper growth. At the same time, rise in benchmark bond yield that resulted in steeper borrowing costs for both corporates and individuals was also a dampener.
The Fed, by the way, had raised its federal funds rate three times this year and that typically spells short-term jitters for stocks, especially, now when the equity market is deemed lofty by some measures. President Trump had also partly blamed the Fed for the market adversities.
The drab investment scenario, thus, took a toll on the Dow Jones Industrial Average. The Dow Jones tanked 5.1% in October, its biggest monthly fall since January 2016. In fact, the Dow Jones was subjected to bouts of volatility last month, with the blue-chip index managing to stay in the green in 10 trading sessions and closing in the negative territory about 13 times.
The Dow Jones, however, did make a terrific comeback in the last three trading sessions, reaching its last three-day gain to more than 900 points. And it's all because of Trump indicating a potential headway in U.S.-China trade relations.
Positive U.S.-China Trade Talks
Trump recently had a "very good conversation" with President Xi Jinping of China. He tweeted that trade discussions with China were "moving along nicely" ahead of face-to-face talks between the two superpowers at the G20 summit in Argentina later this month.
Needless to say, the United States and China have been involved in a tit-for-tat trade clash for a pretty long time that made corporate houses say has increased the cost of goods and services. Major Dow components 3M Company MMM and Caterpillar Inc. CAT had already issued a downbeat 2018 guidance in their latest quarterly reports mostly due to the adverse effects of tariffs.
The United States had imposed tariffs on $200 billion worth of Chinese products at a rate of 10% and is expected to increase the rate to 25% by the end of this year. China, in fact, had vowed to retaliate to Trump's tariff action.
But, it's not just trade-related issues that are having a positive impact on the Dow Jones' upward movement. Recent upbeat corporate earnings on the back of strong economic growth are also keeping the bull market intact.
Earnings Picture Improving on Healthy Economic Growth
Total Q3 earnings are estimated to improve 23.2% from the same period last year on 7.6% higher revenues. Thus, earnings growth is expected in the double-digit territory for the sixth time in the last seven quarters. In fact, earnings for the 313 S&P 500 members that have reported results are up 22.7% from the same period last year on 8.4% higher revenues, with 78% beating earnings estimates and 62.6% surpassing the revenue mark (read more: 3 Takeaways from the Q3 Earnings Season ).
The U.S. economy, in the meantime, recorded the fastest six-month growth in four years in the last two quarters and is on track to hit the Trump administration's annual growth target of 3%. The U.S. economy received a boost in the third quarter, with GDP increasing at an annualized pace of 3.5%, per the U.S. Commerce Department. In fact, the country's total output of goods and services followed an even stronger 4.2% growth in the second quarter (read more: Sharp Surge in Consumer Spending Backs GDP Growth: 5 Picks ).
5 of the Best Blue-Chip Stocks to Buy Now
Thanks to the aforementioned bullish factors, there has been a particularly sharp rally in the Dow. The companies on the index are slated to gain further in the near future as they have large market capitalization, strong balance sheets and solid cash flow. We have, thus, selected five such blue-chip stocks that have a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Intel Corporation INTC designs, manufactures, and sells computer, networking, data storage, and communication platforms. The stock has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has increased 9.7% in the last 60 days. The company's expected earnings growth rate for the current quarter and year are a solid 12.9% and 30.9%, respectively.
Exxon Mobil Corporation XOM is an integrated energy player. The stock has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased 2.4% in the last 60 days. The company's expected earnings growth rate for the current quarter and year are a superb 30.1% and 28.9%, respectively.
Johnson & Johnson JNJ researches and develops, manufactures, and sells various products in the health care field. The stock has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased 0.2% in the last 60 days. The company's expected earnings growth rate for the current quarter and year are a promising 12.1% and 11.8%, respectively. You can see the complete list of today's Zacks #1 Rank stocks here .
JPMorgan Chase & Co. JPM operates as a financial services company. The stock has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased 1.3% in the last 60 days. The company's expected earnings growth rate for the current quarter and year are an encouraging 27.3% and 35.1%, respectively.
Microsoft Corporation MSFT develops, licenses, and supports software, services, devices, and solutions. The stock has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased 3.3% in the last 60 days. The company's expected earnings growth rate for the current quarter and year are a solid 13.5% and 13.1%, respectively.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report JPMorgan Chase & Co. (JPM): Free Stock Analysis Report Johnson & Johnson (JNJ): Free Stock Analysis Report Microsoft Corporation (MSFT): Free Stock Analysis Report 3M Company (MMM): Free Stock Analysis Report Caterpillar Inc. (CAT): Free Stock Analysis Report Exxon Mobil Corporation (XOM): Free Stock Analysis Report Intel Corporation (INTC): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research