Strong Jobs Report Diminishes Fed Rate-Cut Hopes: 5 Winners

A vibrant labor market dashed expectations of an interest rate cut soon. May’s startling uptick in the pace of job additions and wages increased the belief that the Federal Reserve will hold rates at record highs through this summer and maybe beyond.

Nonfarm payrolls increased by 272,000 in May, well above April’s meager gain of 165,000 and above analysts’ estimate of 190,000 new job additions, per the Bureau of Labor Statistics. The figure was also higher than the 232,000 monthly average employment gains for the past year.

Now, the jobless rate may have ticked up to the 4% mark, but there weren’t many indications of a slowdown in the labor market. After all, the yearly wage growth moved up to 4.1% from 4%. Wage growth hovered at the 4% mark since last fall. Additionally, average hourly earnings increased 0.4% in May, following a slowdown to a rate of 0.2% in the prior month.

Relentless job additions and acceleration in monthly employment gains could increase inflationary pressures, which may compel the Fed to remain hawkish. The central bank’s preferred inflation gauge, the personal consumption expenditures index, anyway, was up 2.7% year over year in April, higher than the desired target of 2%.

The CME FedWatch Tool shows that most of the market participants expect no rate cut in the Federal Open Market Committee’s meetings in June and July. What’s more, they are just pricing in a 50-50 probability of a rate cut in the September meeting. All these expectations are sharply down from the beginning of the year.

From an investment standpoint, since interest rates are anticipated to stay higher for longer, astute investors should place their bets on financials, including lenders and insurers. Banks tend to reap the benefits of higher interest rates since they increase the spread between their long-term assets, such as loans, and their short-term liabilities, including deposits, which eventually boosts lenders’ profit margins.

Meanwhile, insurers invest the premiums they receive from policyholders in bonds. Now, elevated interest rates push the yields on these bonds higher, helping insurers to further invest the premiums at a higher yield, and rake in more money.

This calls for investing in stocks such as Bank of America Corporation (NYSE:BAC), Brown & Brown, Inc. (NYSE:BRO), First BanCorp. (NYSE:FBP), Hamilton Insurance Group, Ltd. (NYSE:HG) and The Goldman Sachs Group, Inc. (NYSE:GS), which should be meaningful additions to your portfolio. The stocks boast a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Bank of America is one of the largest financial holding companies in the United States. BAC currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased 3.5% over the past 60 days. The company’s expected earnings growth for the next five years is 7%.

Brown & Brown markets and sells insurance products and services primarily in the United States. BRO currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased 7.1% over the past 60 days. The company’s expected earnings growth for the current year is 28.5%.

First BanCorp. operates as a bank holding company. FBP currently has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings has increased 6% over the past 60 days. The company’s expected earnings growth for the current year is 3.5%.

Hamilton Insurance underwrites specialty insurance and reinsurance risks principally in Bermuda and internationally. HG currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has increased 29.4% over the past 60 days. The company’s expected earnings growth for the current year is 40.6%.

Goldman Sachs is a leading global financial holding company. GS currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings has increased 11.5% over the past 60 days. The company’s expected earnings growth for the current year is 59.9%.

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