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 VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Arista Networks Inc (NYSE:ANET) is a supplier of cloud networking solutions that use software innovations to address the needs of Internet companies, cloud service providers and data centers for enterprise support. The company has a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings increased 3.1% over the last 60 days. The company’s expected growth rate for the current quarter and year are 44.7% and 43.3%, respectively.

CGI Group Inc (NYSE:GIB) directly or through its subsidiaries, manages information technology (IT) services, as well as business process services (BPS). The company has a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings increased 3.1% over the last 60 days. The company’s expected growth rate for the current quarter and year are 11% and 12.3%, respectively.

Banco Santander (MC:SAN), S.A. (NYSE:SAN) is a retail and commercial bank. The bank’s segments include Continental Europe, the United Kingdom, Latin America and the United States. The company has a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings increased 3.8% over the last 60 days. The company’s expected growth rate for the current year is 21.1%.

Huntington Ingalls Industries Inc (NYSE:HII) is a military shipbuilding company and a provider of professional services to partners in government and industry. The company has a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings increased 0.4% over the last 60 days. The company’s expected growth rate for the current quarter and year are 22.2% and 14.2%, respectively.

UnitedHealth Group Inc (NYSE:UNH) is a health and well-being company. The company has a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings increased 0.1% over the last 60 days. The company’s expected growth rate for the current quarter and year are 18.6% and 22.8%, respectively.

5 Trades Could Profit ""Big-League"" from Trump Policies

If the stocks above spark your interest, wait until you look into companies primed to make substantial gains from Washington's changing course.

Today Zacks reveals 5 tickers that could benefit from new trends like streamlined drug approvals, tariffs, lower taxes, higher interest rates, and spending surges in defense and infrastructure.

See these buy recommendations now >>