Investors put their foot on the gas today and turned a good week for the Dow Jones Industrial Average into a great one. The Dow added roughly 823 points today and close to 1,600 points, or 5.3%, for the week to bounce week from a brutal decline the previous week.
The market has been struggling all year, as investors have feared the Federal Reserve's hawkish policy to try and rein in surging levels of inflation that have come on hotter than expected. The Fed is also in the process of reducing its $9 trillion balance sheet, which effectively involves pulling liquidity out of the economy. All of this has made the possibility of a recession a lot higher.
But this week, it looks like investors finally settled into the situation and bought some of the dip, with 28 of the Dow's 30 stocks finishing in the green today. I would recommend looking at Dow's two top finishers today, as both stocks look like good investing opportunities.
Take advantage of the coming boom in IT spending
A recent report from Credit Suisse (CS) suggests that companies may increase their spending on IT services in the coming years.
Analysts Sami Badri and George Engroff said in a report that they expect spending on back- and front-office applications to increase by more than 10% and 9%, respectively, in 2026, compared to 2021.
Few are better positioned to take advantage than the cloud giant Salesforce (CRM -1.10%), whose stock rose 7.5% today and is up more than 16% over the past month.
Credit Suisse also did a survey that showed that 18% of respondents believe Salesforce would experience the biggest increase in IT spend in 2022 on a year-over-year basis, aside from the other tech giants Microsoft (MSFT -2.45%), Amazon (AMZN -1.65%), and ServiceNow (NOW -4.03%).
Salesforce's business has held up better during inflation than perhaps many imagined. Even trading at 39 times forward earnings, the stock looks attractive considering its massive market opportunity.
Looking good after stress testing
The Dow's second-best performer today was Goldman Sachs (GS -0.71%), with shares of the investment bank rising 5.8% today.
The Federal Reserve released the results of its annual stress testing last night and Goldman performed well, showing that it could easily maintain healthy levels of capital even in an incredibly severe recession.
The Fed does stress testing every year to ensure the banking system is durable and able to hold up through an economic downturn. This year, it tested banks in a situation where unemployment between the fourth quarter of 2021 and the first quarter of 2024 would rise and peak at 10.3%. Commercial real estate prices would fall by 40% and stock prices would dip 55%.
During this nine-quarter period, Goldman would suffer more than $18 billion in loan losses and nearly $21 billion of trading and counterparty losses. However, its common equity tier 1 (CET1) capital ratio, a measure of a bank's core capital expressed as a percentage of its risk-weighted assets such as loans, would fall from 14.2% to 8.4%, which is still plenty over the very basic minimum requirement of 4.5%.
The results were better than Goldman performed last year and could allow the bank to enjoy lower regulatory capital requirements, and therefore be able to return more capital to shareholders. I'd expect the bank to release more information on this on Monday. Trading at about 8 times forward earnings, I like the stock.
