Hot industries for 2018 stock investors
Which industries will benefit most from the economic environment?
The hot industries for investors next year are ones that could benefit most from faster economic growth, lower taxes, more spending by companies and less government regulation, Wall Street stock gurus say. ❚ Topping the list? Financial companies, especially banks that lend to people and businesses; industrial companies that make airplanes, weapons and heavy equipment, or those that move goods, such as railroads and package-delivery companies. ❚ And don’t forget technology — the market’s top performer in 2017. Tech will remain strong, thanks to advances in artificial intelligence, robotics and cloud computing, more companies upgrading their tech infrastructure and the continued integration of tech into the workplace and people’s lives. ❚ This Top 3 was gleaned from a USA TODAY review of more than a dozen 2018 investment outlooks from stock market strategists at Wall Street’s largest banks.
Financials make cents
The obstacles that have hobbled banks and other financial services firms since the Great Recession appear to be lifting.
Companies that profit from lending money to consumers and helping people invest for retirement are poised to profit from an American economy that grew at a 3% clip the past two quarters and continues to perform well. Loan growth is expected to rise. Banks are also seen getting a boost from a lower corporate tax rate and the Federal Reserve’s slow and steady interest rate increases.
Banks’ performances will improve amid the Trump administration’s push to reduce regulations put in place after the 2008 financial crisis.
“The negative implications of excess regulation are finally unwinding,” wrote Brian Belski, chief investment strategist at BMO Capital Markets.
Bank profits will also rise along with interest rates. As borrowing costs increase, banks will be able to charge customers more for loans. They’ll make more money on the interest they earn from lending than they pay out to customers with savings and checking accounts.
In general, banks will benefit as the number of economic winners broadens out to more people and investors begin shifting money to parts of the stock market that now are viewed more positively, which includes financial companies, adds Sean Darby, chief global equity strategist at Jefferies.
Investors will also be enriched by banks returning more cash to them via cash dividends and companies buying back their own shares.
Stock buybacks make companies’ earnings-per-share growth appear stronger, which is supportive of stock prices.
David Kostin, chief U.S. equity strategist at Goldman Sachs, expects a “40% rise in the amount of capital that banks will return to shareholders.”
Tech rally redux
Just because tech stocks led the performance race in 2017 doesn’t mean they can’t keep going up.
While FAANG stocks — Facebook, Apple, Amazon, Netflix and Google-parent Alphabet — generated most of the buzz in 2017, the broader tech industry still has the key ingredients to keep rallying.
History shows rising stocks with mojo on their side tend to keep rallying when bull markets are in their later stages — like the current one, which is nearly 9 years old.
“The momentum right now is clearly with tech stocks,” wrote Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Merrill Lynch.
Tech rallied 37% in 2017, the bestperforming industry group in the S&P 500 stock index.
Ongoing trends favor tech companies. They sell a lot of mobile phones, software and services abroad, which will enable them to take advantage of a world where most economies are growing at the same time for the first time in a decade. “Technology,” Subramanian says, “is the most globally exposed sector.”
Tech firms are creating new innovative products — augmented reality, blockchain, autonomous vehicles, social media — that are changing the way people communicate and how companies manufacture products. Tech is increasingly embedded in a wide array of products, from autos to home appliances. Automation on the factory floor also is a growth industry.
The ubiquitous nature of tech means these companies will continue to grow earnings, gain market share and create new businesses at a fast clip.
“Additional growth is anticipated from tech’s embedded nature in the life of consumers,” wrote John Stoltzfus, chief investment strategist at Oppenheimer Asset Management.
Companies will spend more on tech “upgrades” next year amid the shift to new growth areas such as the cloud and as businesses “increase automation in the workplace,” Stoltzfus says.
Industrial strength
The upbeat outlook for industrial companies — such as defense contractors, building products and machine makers — is a bet on a continuing global economic recovery.
Corporations will also spend more to replace aging equipment and tech systems.
The money to finance the spending will come from lower taxes, a stronger economy and a coming change in tax rules. That change will allow companies to take a deduction for the full value of new plant and equipment upon purchase, rather than stringing it out over a number of years.
“The age of equipment in the U.S. remains at all-time highs and desperately needs to be replaced,” Belski says.
Stronger growth around the globe means companies will spend more on new machinery, see increased cargo demand on railroads and profit from the increased pace of automation.
This so-called “upgrade” cycle will be a boon for industrial companies, Kostin says.
The many geopolitical hot spots around the world, including the nuclear standoff with North Korea, could also generate additional business for U.S. defense contractors, Belski says.