Market Sentiment Toward the Fed and Earnings Season

It’s no secret that Wall Street is anticipating a rate cut by the Fed in 2024. However, the concern now lies in the apprehension that the Fed and other influential central banks may not rush to slash rates significantly, especially with inflation persisting above target levels. As a result, investors are bracing for a potential downturn during fourth-quarter earnings season to mitigate the effects of the relentless market surge following the lows in October. The S&P 500 and the Nasdaq are currently in a phase qualifying them to test their long-term 50-day and 200-day moving averages in the early months of 2024.

Stocks to Watch During Earnings Season

Despite the near-term uncertainty that comes with earnings season, investors are urged to consider purchasing three large-cap stocks before their upcoming earnings releases and holding them for the long term, given the significant challenge in timing the market precisely. These stocks include:

Microsoft (MSFT)

Microsoft is scheduled to report its Q2 FY24 earnings results on January 30. The technology giant has been revolutionized by cloud computing, propelling it to consistent sales and EPS growth. Furthermore, Microsoft is poised to expand into artificial intelligence (AI), integrating AI features across various segments of its business like Office. Notably, the acquisition of Activision Blizzard for approximately $70 billion in October solidifies Microsoft’s position in gaming, virtual reality, and the metaverse. With a hefty cash reserve of $144 billion, the company is well-equipped to pursue strategic acquisitions to fuel its growth.

Analysts project Microsoft to achieve approximately 14% revenue growth in both FY24 and FY25, jumping from $212 billion in the previous year to $275 billion in the next. Adjusted earnings are also expected to grow by 14% during the same periods. Microsoft has consistently outperformed bottom-line estimates, earning a Zacks Rank #3 (Hold) at present. Despite having nearly doubled the Tech sector over the past 20 years and soaring 65% in the last 12 months compared to the Tech sector’s 46%, Microsoft’s stock is trading below its average Zacks price target. The company trades at a 10% discount to its 10-year highs with a PEG ratio of 2.1, making it appear relatively undervalued. Coupled with a 10% dividend increase for FY24 and its commitment to share repurchasing, Microsoft presents an attractive proposition for bullish investors.

Procter & Gamble (PG)

Procter & Gamble is set to release its second-quarter fiscal 2024 earnings results on January 23. Renowned for its diverse portfolio of consumer packaged goods, the company’s lineup includes household and personal essentials such as Febreze, Swiffer, Head & Shoulders, and Pampers. With five business categories including Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care, Procter & Gamble is a staple of the consumer staples industry and is projected to achieve 4% sales growth this year and next, while boosting adjusted earnings by 9% and 8%, respectively, according to current Zacks estimations. PG holds a Zacks Rank #2 (Buy) due to its consistent outperformance of EPS estimates over the last five years.

Despite trailing the S&P 500’s 26% growth with an 11% increase over the past three years, PG’s stock is currently trading around 8% below its highs and 12% under its average Zacks price target. With a steady presence above its very long-term moving average and RSI levels, Procter & Gamble presents a compelling case for long-term investors.

The stock might be able to break out of its prolonged holding pattern in 2024 as investors look for gains outside of big tech. Procter & Gamble is trading at a 16% discount to its decade-long highs and near its median at 22.4X forward earnings.

Procter & Gamble – A Value Proposition

PG’s dividend yields 2.5% to outpace its industry’s 2.4% average. P&G is also one of fewer than 70 S&P 500 Dividend Aristocrats, which are firms that have both paid and raised dividends for at least 25 years running.

United Rentals: Growth and Resilience

United Rentals, an equipment rental star, said it will release its Q4 FY23 results on January 24. URI’s growing portfolio of large equipment includes scissor lifts, towable light towers, generators, excavators, and nearly everything else under the sun its clients might need. Customers across construction, utilities, energy, home builders, and beyond count on United Rentals for various offerings across different timeframes.

United Rentals has lifted prices alongside inflation and it is benefiting from its Ahern Rentals acquisition in late 2022. The firm’s revenue was booming before the pandemic, with sales up between 15% to 21% for three straight years until they slipped in 2020. URI quickly left its Covid setbacks behind and posted 14% sales growth in FY21 and 20% in 2022.

United Rentals carried over its momentum in 2023, topping our Q2 and Q3 earnings estimates. The company reaffirmed its 2023 guidance last quarter, and URI’s management team remains confident in its longer-term outlook. The firm expects it will benefit from the ongoing investment super cycle in the U.S. across infrastructure, industrial manufacturing, and energy and power.

The company’s earnings outlook has slipped slightly compared to where it was this time last year. But its 2025 estimates have improved recently. Plus, URI’s sales are projected to jump by 22% in 2023 and another 4% in 2024 against a difficult-to-compete-against period. Meanwhile, its adjusted earnings are projected to surge by 26% and 6%, respectively.

URI has surged 590% in the past 10 years to crush the S&P 500’s 170% and the Zacks Construction sector’s 155%. United Rentals is up 42% in the last 12 months, including some large swings.

URI’s recent slip below its 21-day moving average might mean it will be forced to test its 50-day soon. Thankfully, it is already at neutral RSI levels vs. overbought in December.
Some investors might want to wait for it to slide to the longer-dated trendlines such as the 21-month depicted in the nearby chart.

Yet, the stock appears to be worth simply buying and holding through any near-term downturns since it trades at a 21% discount to its sector despite its huge long-term outperformance and 25% below its highs at 12.9X 12-month forward earnings. And its dividend yields 1.1%.