Here are the stocks to buy and the ones to sell if interest rates stay high, says Jefferies

By Barbara Kollmeyer

Critical information for the U.S. trading day

A summer swoon that has been chipping away at stocks since early July was egged on Tuesday with news that Americans have hardly curbed their spending.

Investors have been grappling with growing expectations for an economic "soft landing," or no landing at all, that could open the door to more Fed hikes. Even as that pushes back on recession fears, they've been seizing on that other reasons to sell equities, including China worries and some earnings disappointment, along with technical factors.

Read:The S&P 500 is flashing a selloff warning after breaking below its 50-day moving average

Our call of the day from Jefferies strategists offers up an approach to stocks that they say works well if U.S. rates are set to stay higher for longer and the economy holds up.

Alongside this and based on a soft-landing scenario, a team led by Desh Peramunetilleke, global head of microstrategy, have lifted their year-end S&P 500 target to 4,500 from 4,050, or up some 1.4% from Tuesday's close. They say that assumes a 2024 earnings per share estimate of around $230 and a year end price/earnings target of 19.6 times.

Jefferies notes that only 28% of S&P names have outperformed this year, but expects stocks beyond mega cap tech may start participating. Still, Peramunetilleke and co see growth staying low for the rest of 2023, and suggest seeking out sectors with earnings momentum, such as communication services, industrials and consumer discretionary, but not financials, healthcare or energy.

As for the soft-landing playbook, the Jefferies team advises investing in companies with high operating leverage, profitability and robust balance sheets. Cyclicals make up the bulk of those names, and they see autos, discretionary retail, software, materials, capital goods and commercial services faring best in a strong-growth scenario,

Here's a partial list of their picks -- Adobe (ADBE), Intuit (INTU), ADP (ADP), TJX (TJX) (just reported early Wednesday, see below) and 3M (MMM) are at the top:

On the other side of that trade, Peramunetilleke and the team say a soft landing view is less positive for companies with high short-term debt and gearing. Their screen came up with several utility names, such as Duke Energy (DUK), Dominion Energy (D), American Electric Power (AEP), Edison International (EIX) and Eversource Energy (ES). General Motors (GM) is also on that list.

That's not the only theme Jefferies strategists think investors should be paying attention to right now. They are keen on companies with cashflow-supported buybacks, cash-rich balance sheets and stable businesses with higher returns. Those names include Apple (AAPL), Alphabet (GOOGL), Meta Platforms (META), AbbVie (ABBV) and Cisco (CSCO) at the top.

The AI wave is another theme that Jefferies updates on, noting that their basket of stocks correlated to AI king Nvidia has outperformed S&P 500 by 36% since the beginning of the year, while also demonstrating a robust earnings outlook. But they caution that "the basket's stretched valuations are concerning." The top five names in that basket are Broadcom (AVGO), Oracle, (ORCL) Adobe (ADBE), AMD (AMD) and Applied Materials (AMAT).

The markets

Stocks SPX DJIA COMP are mixed mildly following Tuesday's rout, with the yield on the 10-year Treasury note BX:TMUBMUSD10Y at 4.21%, the dollar DXY lower and oil slightly higher.

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor's Business Daily.

The buzz

Housing starts came in stronger than expected for July, while industrial production jumped during that month. Still to come are the minutes of the Fed's July meeting at 2 p.m. Ahead of that, data showed mortgage demand falling as rates rose the third straight week to the highest since Oct. 2022

Target (TGT)lowered its profit forecast for the year, citing recent sales trends, though its second-quarter profit handily beat estimates and shares are up 8%. Discount retailer TJX (TJX) is up over 3% after blowing past estimates and lifting guidance.

Tech names Cisco (CSCO) and Synopsys (SNPS) will report after the close.

Plus:Why is Palo Alto Networks reporting earnings Friday afternoon? The strange timing draws speculation

Coinbase (COIN) shares are up 5% after the crypto broker got the OK to offer U.S. customers crypto futures

H&R Block (HRB) stock is up 5% after upbeat results from the tax-preparer.

Shares of Sacks Parente (SPGC) are slumping after a strong rally Tuesday on the golf-equipment maker's Nasdaq debut.

Intel (INTC) has called off its proposed $5.4 billion acquisition of Tower Semiconductor (TSEM.TV) after failing to win the needed regulatory approvals.

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The chart

Extend that summer vacay? Investors may be facing a dull few months, say strategists and chartists:

The tickers

These were the most active stock-market tickers as of 6 a.m. Eastern.

Ticker  Security name 
TSLA    Tesla 
AMC     AMC Entertainment 
TTOO    T2 Biosystems 
NVDA    Nvidia 
NIO     NIO 
APE     AMC Entertainment Holdings preferred shares 
CA:TAI  Talmora Diamond 
GME     GameStop 
AAPL    Apple 
MULN    Mullen Automotive 

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-Barbara Kollmeyer

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08-16-23 0959ET

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