S&P 500 Breaks 20-Year Record: 5 Best Buys

U.S. stocks continue to extend their winning streak with the S&P 500 carving its sixth straight record close on Oct 5, the longest since June 1997. The market value-weighted index also completed its eight-day long winning streak, the longest since 2013. The broad index has posted its 43rd record close in 2017 so far and is up 350% from the low hit in March 2009. In fact, the index has more than doubled in the decade ever since its pre-crisis peak of October 2007.

So, what has driven the S&P 500 higher? Investors cheered the first step toward enacting major tax reforms later this year after the Republican-controlled U.S. House of Representatives approved a 2018 budget resolution. Renewed optimism over tax cuts propelled the buying of assets perceived as risky, including financial and tech stocks.

Investors’ sentiments were also buoyed by narrowing of the U.S. trade deficit and rebound in exports, which might boost the economy in the third quarter. The U.S. economy is already growing close to the range projected by the White House, while both manufacturing and service sectors accelerated at a record pace last month. Banking on such bullish trends, investing in fundamentally sound stocks listed under the S&P 500 seems judicious.

House Passes $4.1-Trillion Budget

The House of Representatives, led by Speaker Paul Ryan, passed a $4.1-trillion budget legislation that paved the way for them to rewrite the much awaited tax code later this year. The budget aims to repeal Obamacare and also contains $1.1 trillion in non-entitlement outlays, including nearly $622 billion for defense.

The far-reaching plan will trim taxes for individuals as well as corporates. The tax plan aims to create three individual tax brackets with rates of 12%, 25% and 35%, while the corporate tax is expected to be slashed from 35% to 20%. These tax reforms will put the economy in overdrive, which will offset the revenue loss and not add to national debt that is now above $20 trillion.

Republicans’ major tax bill, known as budget reconciliation, required a simple majority in the Senate. The final tally was a narrow 219 to 206, with majority adopting the House of Representatives’ version of the budget.

Financials and Technology Led Advancers in the S&P 500

Banks face high tax burden, which makes them big gainers when tax rates go down. As per KBW estimates, JPMorgan Chase (NYSE:JPM) , Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC) will enjoy a 20% or more hike in profits if the corporate tax rate is lowered to 20%. Banking on such optimism, shares of banks scaled north.

Among tech behemoths, Apple (NASDAQ:AAPL) , Microsoft (NASDAQ:MSFT) , Alphabet (NASDAQ:GOOGL) , Cisco Systems, Inc. (NASDAQ:CSCO) , Oracle (NYSE:ORCL) and Netflix, Inc. (NASDAQ:NFLX) hold 88% of their money overseas. The tax plan seeks to encourage such multinationals to bring those profits back to the United States by cutting the tax rate. Shares of these companies scaled higher, with Netflix turning out to be the biggest gainer on the S&P 500, ending the day 5.4% higher at $194.39.

Other sectors, including telecom, consumer staples and consumer discretionary, that tend to pay more to Uncle Sam also benefitted immensely.

Investors Happy on Solid Economic Data

The U.S. international trade deficit fell by nearly $1 billion in August from July, while exports rose slightly to $128.9 billion in the month. This is quite encouraging as analysts had feared that hurricanes might affect trade data for August, with exports delayed due to storms.

The U.S. GDP, in the meanwhile, expanded 3.1% in the second quarter, the fastest in more than two years. It is also up slightly from a previously reported 3%. An uptick in consumer outlays and business investment drove the upside. A key yardstick of manufacturing activity in the United States also scaled a 13-year high in September, while non-manufacturing activity picked up to a 12-year high. According to the Institute of Supply Management (ISM), the manufacturing index climbed to 60.8% in September from 58.8% in August. The non-manufacturing gauge came in at 59.8% last month from 55.3% in the prior month.

5 Top S&P 500 Stocks to Buy Now

With the S&P 500 scaling record highs on tax cut hopes and a strengthening economy, investing in sound stocks from the index seems a prudent choice. We have, thus, selected five stocks that have not only gained immensely in the last two decades but also have the potential to move further north.

These stocks sport a Zacks Rank #2 (Buy) and a Zacks Investment Research

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Written By: Zacks Investment Research