The U.S. economy is teetering on the brink of a recession due to the Fed’s aggressive interest rate hikes, multi-decade high inflation, and ongoing geo-political conflicts. Although the policymakers have hinted at a slower pace of rate hikes going forward, the chief U.S. economist at S&P Global Ratings, Beth Ann Bovino, believes that the federal funds rate will reach 5% to 5.25% by the second quarter of 2023. She expects a recession in the next year, with the U.S. GDP growth weakening to negative 0.1%.

However, in October, consumer spending remained strong, with a 0.8% sequential increase from the prior month. Also, November nonfarm payrolls increased 263,000 for the month, well above the 200,000 estimates, while the unemployment rate was 3.7%, the Labor Department reported. 

“The good thing about these numbers is that it shows the U.S. economy firmly got back to growth in the second half of the year,” said Fitch Ratings chief economist Brian Coulton.

While uncertainties remain, investors should consider buying fundamentally sound stocks, Microsoft Corporation (MSFT) and Merck & Co., Inc. (MRK), that Wall Street always likes to stick with.

Microsoft Corporation (MSFT)

Tech behemoth MSFT creates, licenses, and provides support for software, services, products, and solutions across the globe. It operates in three segments- Productivity and Business Processes; Intelligent Cloud; and More Personal Computing.

On November 16, MSFT and Lockheed Martin announced the expansion of their strategic alliance to help power the next generation of technology for the Department of Defense (DOD) with classified Cloud Innovations, Artificial Intelligence/Machine Learning (AI/ML), Modeling, and Simulation Capabilities; 5G.MIL® Programs; and Digital Transformation. This should be strategically beneficial for the company.

On November 14, MSFT launched the Microsoft Supply Chain Platform that combines the best of Microsoft AI, collaboration, low-code, security, and SaaS apps to help organizations maximize their investment in supply chain data estate. This should help businesses make the most out of their current investments to gain insights and act quickly.

On November 29, MSFT announced that its board of directors declared a quarterly dividend of $0.68 per share, payable on March 9, 2023. MSFT has raised its dividends for 18 consecutive years. It pays a $2.72 per share dividend annually, which translates to a 1.07% yield on the current price. Its four-year average dividend yield is 1.05%. MSFT’s dividend payments have grown at a CAGR of 10.4% over the past three years.

For the fiscal 2023 first quarter ended September 30, 2022, MSFT’s total revenue increased 10.6% year-over-year to $50.12 billion, while its gross margin was $34.67 billion, up 9.5% year-over-year. Its operating income grew 6.3% from the prior-year period to $21.52 billion. MSFT’s income before income taxes came in at $21.57 billion, a 5.1% increase from the year-ago value.

The consensus EPS estimate of $9.53 for the current fiscal year ending June 2023 indicates a 3.5% year-over-year improvement. Likewise, the consensus revenue estimate for the same year of $212.95 billion reflects a rise of 7.4% from the prior year. The company surpassed EPS estimates in three of the trailing four quarters, which is impressive.

The stock has gained 15.9% over the past month to close the last trading session at $255.02.

MSFT’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

The stock has a B grade for Stability, Quality, and Sentiment. Within the Software – Business industry, it is ranked #9 of 53 stocks.

Beyond what we stated above, we also have MSFT’s ratings for Growth, Value, and Momentum. Get all MSFT ratings here.

Merck & Co., Inc. (MRK)

MRK, a global healthcare company, operates through its two broad segments, Pharmaceutical, which offers human health pharmaceutical products, and Animal Health, which develops and markets veterinary pharmaceuticals.

On November 22, the company announced positive topline results from the pivotal Phase 3 KEYNOTE-859 trial investigating KEYTRUDA, MRK’s anti-PD-1 therapy, in combination with chemotherapy for the first-line treatment of patients with human epidermal growth factor receptor 2 (HER2). If approved, MRK should be able to provide a new treatment option for patients fighting gastrointestinal cancers and thus expand its revenue stream.

On November 21, MRK and Imago BioSciences, Inc. (IMGO) announced that the companies have entered into a definitive agreement under which MRK, through its subsidiary, will acquire Imago for $36.00 per share in cash for an approximate total equity value of $1.35 billion. This acquisition should strengthen MRK’s presence in the field of hematology.

On November 29, MRK declared a quarterly dividend of $0.73 per share on its common stock, which was payable to shareholders on January 9.,2023. The company’s annual dividend of $2.92 yields 2.65% on its current share price. The company’s dividend payouts have increased at a 9.6% CAGR over the past three years and a 9% CAGR over the past five years. The company has an excellent record of 11 years of consecutive dividend growth.

MRK’s sales increased 13.7% year-over-year to $14.96 billion in the fiscal third quarter that ended September 2022. The company’s non-GAAP net income grew 3.9% year-over-year to $4.70 billion. Its non-GAAP earnings per share rose 3.9% year-over-year to $1.85.

Street expects MRK’s revenue to increase 21.3% from the prior-year period to $59.07 billion for the fiscal year ending December 2022. The consensus EPS estimate of $7.38 indicates a 22.7% improvement year-over-year for the same year. The company has an impressive surprise earnings history, as it has surpassed consensus EPS estimates in each of the trailing four quarters.

The stock has gained 43.6% year-to-date to close its last trading session at $110.04. It gained 10.7% over the past month.

It is no surprise that the stock has an overall rating of A which translates to a Strong Buy in our proprietary rating system.

MRK is rated a B in Value, Sentiment, and Quality. Of the 162 stocks in the Medical – Pharmaceuticals industry, it is ranked #12.

Click here to see additional POWR Ratings for Growth, Momentum, and Stability for MRK.

MSFT shares were trading at $251.59 per share on Monday morning, down $3.43 (-1.34%). Year-to-date, MSFT has declined -24.49%, versus a -14.29% rise in the benchmark S&P 500 index during the same period.

About the Author: Komal Bhattar

Komal's passion for the stock market and financial analysis led her to pursue investment research as a career. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities. More...

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