When the recent U.S. election provided a surprise, we got this old bull market to spring back to life. There are three keys to the market’s reaction, but not all of them are bullish.
- A Republican President and GOP control of Congress increases the chance of passing a spending bill. That led scores of analysts to raise earnings-per-share estimates on companies that can benefit, particularly from infrastructure and defense spending. There also may be less regulation on the healthcare and financial sectors.
- Expectations of higher government spending and lower taxes has been the main driver behind recent bond investor transactions. Investors sold their U.S. Treasuries to buy stocks or move to cash or alternatives. T-bond selling pushed risk-free federal government bond interest rates sharply higher. Remember, T-bond prices and interest rates move in opposite directions.
- However, the equity market sky is not clear to the horizon. Respected market strategists have spoken up with meaningful concern. This fearless stock market looks to be underestimating the possibility of President Trump rattling risk markets during his four-year term. He remains unpredictable.
There are big GDP growth negatives to higher long-term bond rates. Think about the pace of house buying and the effects of a stronger U.S. dollar. There are also negatives to less regulation. Recall the poorly regulated securitized mortgage markets in 2006.
One of the beneficiaries of this recent bullish outlook may be defense stocks. The 13-company strong Zacks Aerospace-Defense industry sector has been bid up in recent trading, gratis the widely covered Trump rally.
However, industry EPS fundamentals help keep these shares aloft too. The current Aerospace-Defense Zacks Industry Rank comes in at a solid #35 out of 265, rising 12 industry spots in recent weeks. Covering analysts raised their estimates 40 times during this period, with only five cutting estimates.
Should you buy now? Not If Zacks Valuation scores are too high on the given stock.
Sell and take profits on the largest defense players that get poor Zacks Value scores. Once significant profit taking occurs, you might want to dip a toe back in the water.
Bone up on the smaller less-known Aerospace-Defense players. Find one that looks relatively more attractive. Here are three top Zacks-Ranked Defense stocks to take a look at: General Dynamics (GD): Zacks #2 Rank (BUY); Northrup Grumman (NOC): Zacks #1 Rank (STRONG BUY) and Engility Holdings (EGL): Zacks #1 Rank (STRONG BUY).