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4 Blue-Chip Stocks to Win Big on Phase-One Trade Deal

Nilanjan Banerjee

The United States and China have signed the much-anticipated phase-one trade deal. While Washington has pledged to cut some tariff on Chinese imports, Beijing has agreed to purchase more goods and services from America.

Although most of the details on the deal were known, the phase-one accord has lent the much-needed impetus to keep the nation’s longest economic expansion on track. Wall Street rallied following the first phase of the U.S.-China trade pact, with Dow Jones Industrial Average and S&P 500 closing at record highs.

More on the Phase-One Trade Deal

Per the deal details released by the office of the U.S. Trade Representative, Beijing has agreed to boost purchase of products and services from Washington by at least $200 billion in the next two years. For comparison purposes, the accord considered 2017 as the baseline.

China has pledged manufacturing purchases from the United States of an additional $77.7 billion in two years’ time. In 2020 and 2021, Beijing will buy an additional $32.9 billion and $44.8 billion of manufacturing products, respectively. Thus, the second-largest economy’s total imports of manufactured goods from America will total no less than $120.0 billion in 2020 and $131.9 billion in 2021. China’s manufacturing purchases are likely to comprise electrical equipment, pharmaceutical products, industrial machinery, vehicles, optical & medical instruments, aircraft, iron & steel, hardwood lumber, solar-grade polysilicon, and other goods.

As compared to a baseline of $9.1 billion in 2017, China has agreed to purchase additional energy products of at least $52.4 billion over two years. The deal also included $32 billion of additional U.S. agriculture products purchases over the time frame. From Washington, Beijing has decided to buy services of an additional $37.9 billion over the two years’ time. 

Included in the phase-one accord, Washington will halve the tariff rate levied on Sep 1 on a list of Chinese goods, worth $120 billion, to 7.5%. Moreover, the United States indefinitely called off the Dec 15 implementation of 15% tariffs on $160 billion worth of China goods — comprising toys, laptops, cell phones and clothing. Beijing also suspended the retaliatory tariffs of 25% on American autos that were set to go into effect on the same day. However, to leverage negotiations for the second phase in 2020, the United States has kept its 25% duty on $250 billion worth of Chinese goods in place.

The agreement will also address some of the complaints made by America about the practices of intellectual property.

Favorable Labor Market

Although data from the Labor Department showed that the pace of hiring slowed last December, most of the economists believe that the job growth data was satisfactory enough to keep the nation’s longest economic expansion on track.  

Moreover, the country’s jobless rate was at a 50-year low of 3.5% in December, per the closely-watched monthly employment report of the Labor Department.

Earnings to Bounce Back in 2020

After a disappointing 2019, we expect a rebound in earnings this year.

For the December quarter of 2019, S&P 500 is likely to have seen a year-over-year earnings decline of 3.2%. Notably, in the first and third quarter of 2019, the S&P 500 witnessed an earnings decline of 0.1% and 1.7%, respectively. In the second quarter of 2019, the index saw a marginal improvement of 0.6%. Thus, more-than-a-year-long trade spat that prompted the slowdown in the global economy has primarily hurt the companies’ overall business.

However, the historic phase-one deal has renewed investors’ hopes and spurred Wall Street. The corporate earnings picture is likely to recover in 2020 and we are expecting year-over-year earnings growth in the first, second, third and fourth quarter of 2020 to be much healthier at 3.8%, 3.6%, 7.7% and 11.2%, respectively.

Stocks to Make Merry

With Dow and S&P 500 closing at record highs on phase-one trade deal, the upward trend is likely to continue as a favorable labor market and expectations for healthy corporate earnings picture for 2020 have been acting as catalysts. Thus, to outdo market returns as well as take advantage of the aforesaid factors, we have used the Zacks Stock Screener to narrow down on blue-chip stocks, carrying a Zacks Rank #2 (Buy). These companies also have a strong dividend yield, ensuring  a regular income stream for investors. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Headquartered in New York, JPMorgan Chase & Co. JPM is a leading financial services company. The Zacks Rank #2 stock beat the Zacks Consensus Estimate for earnings in the prior four quarters, the average positive earnings surprise being 9.6%. Over the past 30 days, the stock has witnessed positive earnings estimate revisions for 2020 and 2021. Moreover, the company has a dividend yield of 2.6%, compared with the S&P 500’s 1.7%.

Based in New Brunswick, NJ, Johnson & Johnson JNJ is primarily involved in manufacturing and selling healthcare products. The #2 Ranked company is likely to see earnings growth of 5% in 2020.  The company’s current dividend yield is 2.6%.

Chevron Corporation CVX, headquartered in San Ramon, CA, is a leading integrated energy player. In 2020, the Zacks #2 Ranked company is likely to see earnings growth of 5.1%. The company’s current dividend yield is 4.1%.

Headquartered in Cincinnati, OH, The Procter & Gamble Company PG provides branded consumer packaged goods to consumers. The #2 Ranked company is likely to see earnings growth of 9.3% in fiscal 2020.  The company’s current dividend yield is 2.4%.

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JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report
 
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