Top 10 S&P 500 stocks to play an improving US economy

America’s S&P 500 index of the country’s largest corporations fell by 4.3% in October. That left many investors wondering whether the party for equities over the past two years was finally over. For the time being, at least, it seems not. The index quickly bounced back and has been making new highs ever since. Among the shares that have been recovering quickest are those that benefit when US consumers are feeling confident. For investors, these consumer-focused stocks could offer a way of playing the improving health of the US economy.

Why are US consumers feeling confident?

A recent survey by Thomson Reuters and the University of Michigan found that US consumer confidence grew for the third month in a row in October. It’s now at its highest level since July 2007 as a result of improved personal finances and a more favorable outlook for the overall economy.

Contributing to that upswing in sentiment is the fact that the price of oil has slumped from around $92 to $75 per barrel over the past three months. That has seriously dented valuations in the Oil & Gas sector - last week ExxonMobil ceded its position as America’s second most valuable company to Microsoft (the first time that’s happened in 10 years). But according to analysts, low oil prices (caused by a glut of supply) are stimulating the US economy and putting more money into the pockets of consumers as a result of lower prices at the pump.

All this is great news for consumer oriented sectors. Take a look at US sector performances over the past three months and it’s clear where investor funds are flowing: Food and Drug Retail has outperformed the broader US market by 4.9%. By contrast, Oil & Gas has undershot by 29.1%.

Finding strong stocks

So which US consumer-focused stocks offer an opportunity to play this improving economic health? We filtered the US markets using Stockopedia.com’s screener to isolate consumer defensive and consumer cyclical stocks with a StockRank of more than 90 out of 100. StockRanks are calculated by scoring and then ranking every company in the market based on their financial quality, valuation and price and earnings momentum. Each of those factors is scored using a range of criteria that’s combined into a single StockRank number - you can read much more about how that works here. It’s important to remember that StockRanks are a guide to what works in broad-based portfolios over time - you should always do your own research.

Among the high ranking defensive stocks on the list are food processing firms like Archer Daniels Midland and Tyson Foods, which both have StockRanks of 99. Also ranking well is Cardinal Health, a £17bn pharmaceutical services group.

Retailers dominate the cyclical stocks on the list. Electronics group Best Buy leads the way with a StockRank of 99, with others including video game retailer GameStop and well known chains Staples, PetSmart and Home Depot all ranking well. Cable TV business Cablevision Systems and auto parts supplies firm Genuine Parts also feature.  Subscribers can see the full (and constantly updated) screen results here.

Playing the US recovery

Investors are regularly warned that the fragile economic recovery could go wrong quickly and easily. However, the strong performance of US consumer sectors during the recent market volatility suggests that American consumers are certainly feeling more confident. For investors looking for opportunities in US markets, those stocks that benefit most from this growing confidence could be worth a closer look.

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