AI is the next big thing in tech stocks
UBS forecasts that S&P500 dividends will increase by about 30%, or $150 billion, by the end of 2022, owing to a strong recovery in earnings. According to S&P Dow Jones Indices, U.S. domestic common stock dividends increased $12.9 billion during the second quarter, compared to a $42.5 billion drop a year ago at the height of the Covid crisis.
The bank tested a number of potential explanatory variables using various algorithms and identified 17 key drivers of dividend trends. The models discovered that dividend yield, dividend growth, payout ratios, and EPS revisions all play a significant role in a company’s ability to increase payouts. UBS’s top potential dividend growers meet the following criteria:
Stocks in the top 25 are expected to see significant dividend increases.
A market capitalization of more than $7 billion
UBS analysts rate the stock as a buy.
Stock with a minimum dividend yield of 2%.
According to UBS, Morgan Stanley will have a dividend yield of 2.3 percent in the next 12 months. The Wall Street behemoth announced at the end of June that it would double its quarterly dividend to 70 cents per share beginning in the third quarter, and that it would buy up to $12 billion of its own stock until June 2022.
Dividends are also expected to rise significantly for industrial companies such as United Parcel Service and Illinois Tool Works.
According to UBS, HP Inc.’s dividend could be increased to 2.8 percent within the next year. The technology company reported strong second-quarter results, outperforming the market on both the top and bottom lines. This year, the stock is up 16%.
Eastman Chemical Company, EOG Resources, and Extra Space Storage are also on the list.
Meme stocks take a break
On this front, Microsoft is worth keeping an eye on. In terms of broad ownership as a consensus core position and non-cyclical steward of capital, I believe it is more important than AAPL. When the stock has pulled back this year after a sprint higher, it has coincided with a few weeks of S&P plateauing.
The Russell can have large caps at times. Poor Russell performance can sometimes lead to a drop in the S&P 500. Other times, small caps go nowhere for years while the S&P rises. All else being equal, bulls would prefer smalls to lead and the rally to remain broad, but this isn’t critical. Furthermore, Russell has outperformed the S&P 500 by 13 percentage points over the last year.
Over the course of two days of Q&A, Powell was able to influence very little of the monetary debate. He acknowledged that the debate over tapering would be ongoing, but he left room for flexibility in terms of timing. Powell also claims that we haven’t seen “substantial further progress” on key economic goals when measured against December conditions (the Fed’s standard).
Treasury yields on the 10-year note have risen back toward 1.3 percent, pricing in slightly higher odds of a possible “mistake” of premature tightening dampening longer-term growth and inflation, but yields remain above the lows, so the alarm bells aren’t ringing. Even though Atlanta Fed GDP real-time second-quarter forecast is down to 7.9 percent from over 10 percent a month ago, jobless claims and regional Fed surveys are decent, and the macro picture is OK.
Sentiment has mellowed slightly. Retail bulls in AAII have backed off. Tactical traders have “high-neutral” exposure levels according to NAAIM. Meme stocks appear to be in trouble, and put buying has increased. It’s preferable to see unending optimism.
As previously stated, market breadth is skewed to the downside, with the equal-weight Russell 1000 down 2% this week. The VIX is slightly higher as mega-caps ease back, there may be a floor developing as the S&P stalls, and everyone is aware that we are now entering a seasonally dodgy period for stocks.
Stimulus can keep on boosting stock prices
“I think the whole question for investors is centered around what’s going to happen in Washington, D.C., and certainly state houses… regarding how long this free money stimulus is going to last,” Gundlach said: “As long as it continues, I believe the stock market can remain at nosebleed levels and grind higher.”
The so-called bond king also acknowledged the Fed’s role in boosting equities through open-ended quantitative easing and near-zero interest rates.
“The Fed continues to buy bonds and press interest rates, which has supported the stock market,” Gundlach explained. The money manager stated that he changed his portfolio a few months ago in order to increase his stock holdings while decreasing his cash position.
The S&P 500 has risen about 16% in 2021 to new highs on the back of the economic recovery, shattering fears of inflation and slowing growth. The bond market, however, according to Gundlach, is telling a different story, believing the Fed will eventually withdraw its easy money policy in the face of rising price pressures.
“The bond market is thinking one move ahead in the chess game that the Fed may actually have to start seriously reducing these bond buying programs and, God forbid, start raising short-term interest rates,” Gundlach said.
Long-term Treasury yields have fallen in response to recent high inflation readings, while short-term yields have risen. On Thursday, the 10-year yield, which is more closely linked to economic growth, fell as low as 1.299 percent. The 2-year yield, which is most sensitive to Fed policy, rose to 0.233 percent after remaining in the 0.1 percent range for the previous three months.
Federal Reserve Chairman Jerome Powell maintains his belief that the current inflationary surge is only temporary and will be offset as conditions return to normal.
Powell stated on Wednesday that the Fed’s goal of “substantial further progress” toward full employment and stable prices is still “a long way off.”
“It’s becoming difficult for the Fed to talk about this inflation situation as temporary, or transitory, as they like to say,” Gundlach said, adding that recent inflation data reminds him of the 1970s, when extraordinary inflation resulted in nearly 20% interest rates.