Technology stocks entered 2022 on a bullish note, with the tech-heavy Nasdaq having hit an all-time record closing high of 16,057.44 on November 19, 2021, and a record intraday high of 16,212.23 a couple days later, on Monday, November 22, 2021.
That momentum failed to materialize. In fact, the Nasdaq has been the worst-performing North American index this year. With just one month to go in the year, the Nasdaq is deep in bear market territory, down 31% over November highs. A bear market is defined as a loss of more than 20% from recent highs.
In comparison, the New York Stock Exchange is down 12% from its January highs. Meanwhile, popular indexes like the S&P 500 are down 11% year-to-date and the Dow Jones Industrial Average has lost just seven percent of its value this year.
Why Are Tech Stocks Experiencing an Oversized Hit?
One big reason tech stocks are experiencing an oversized hit is rising interest rates. During the pandemic, the Federal Reserve and Bank of Canada both slashed their key lending rate to make it cheaper to borrow in an effort to stave off a recession. Low interest rates make it easy to borrow, which is great for some tech stocks that need lots of capital to run their business.
While many early-stage tech stocks were reporting solid revenue growth, their value, and by extension share price, is based on the kind of earnings they expect to report in the future. This dynamic changes in a rising interest rate environment. Not only is it more expensive to borrow but higher rates mean it costs more to carry that debt load, which weighs down on a company’s bottom line.
On top of this, lower interest rates are designed to encourage us to spend, and in turn, juice the economy. Lower interest rates helped energize the economy too much. Which has resulted in decades-high inflation. To curb inflation and discourage borrowing, central banks have been raising their rates.
The Federal Reserve has raised its rates six times this year, from 0.5% to a range of 3.75% to 4.0%, the highest since early 2008. The Bank of Canada, meanwhile, has raised its key lending rate six times as well, jumping from 0.25% to 3.75%.
These actions have had a devastating impact on tech stocks. And not just early-stage companies. Even the FAANG stocks have taken a beating. FAANG is an acronym that refers to a group of big tech companies, including Facebook parent Meta Platforms, Apple, Amazon, Netflix, and Google parent Alphabet.
All of these companies have a history of outpacing the Nasdaq, but it’s been a different story in 2022, with all but one of those stocks lagging the index: Apple. While Apple’s stock may be down 14% this year (but up 7% over the last six months), that’s significantly better than Meta, which, as of this writing, is down 67% in 2022, Amazon, has lost 43% of its value in 2022, Netflix has fallen 52%, and Alphabet has retraced 32%.
Why Is Apple Bucking the Big Tech Sell-Off in 2022?
Despite stubbornly high inflation and rising interest rates, Apple has defied the big meltdown that has plagued the rest of the tech industry. It all comes down to Apple’s products and loyal customer base.
In the September quarter, revenues jumped eight percent year-over-year to a record $90.1 billion, topping Wall Street projections of $88.9 billion. The Cupertino, California-based company posted quarterly records for the Americas, Europe, Greater China, and the rest of Asia-Pacific.
Most importantly, Apple reported an earnings beat of $1.29 per share, ahead of Wall Street consensus of $1.27.
The outlook for Apple remains robust with the company’s services infrastructure as strong as ever:
- Active devices hit another record high
- iPhone and Mac reported quarterly record for upgrades
- There was a double-digit jump in customers moving to iPhones
- Sales of Mac computers hit a record high
- Almost half of all Mac buyers are new
- More than half of all iPad buyers are new
- Two-thirds of Apple Watch buyers were new to the device
Given the state of the economy, how is Apple able to report strong sales and earnings growth when other tech titans are reporting weak results? It certainly doesn’t have anything to do with the company’s pricing. Apple is known for charging a premium for its products. And Apple still has to contend with the same kind of supply chain issues all of the other tech companies need to.
The fact is, Apple launches the kinds of products that people love. Customers continue to spend a lot of money on Mac computers and iPhones, with new customers flocking to its iPads and Apple Watches.
This kind of loyal customer base is not lost on Wall Street’s investing giants like Warren Buffett. Berkshire Hathaway, a holding company with a market cap of $677 billion, is the third largest institutional holder of Apple Inc, with 894.8 million shares, worth an estimated $135.4 billion. Apple is also Buffett’s largest holding.
Apple Once Again Becomes the World’s Most Valuable Company
Strong financial results, an equally strong outlook, and cooling inflation data is helping juice Apple’s stock and outpace the broader tech industry. Investor optimism has actually helped Apple overtake Saudi Aramco as the world’s most valuable company, again.
On November 10, Apple’s stock soared nine percent, more than $190 billion in a single day. It was a record one-day gain for a U.S.-listed stock. The one-day move helped Apple’s stock rally to a market cap of $2.34 trillion.
Investor optimism has increased since then. Over the following week, Apple’s market cap continued to climb, and currently stands at $2.36 trillion. It’s not just investors that are bullish on Apple, analysts are too, with nine increasing their earnings revisions over the last 30 days. Analysts are not taking a bearish stance.
Over the next two years, Wall Street expects Apple’s earnings to increase 11% from $6.11 in fiscal 2022 to $6.82 in fiscal 2024.
This bodes well for Apple’s stock in a high interest and inflation market and points to even better times for the company once inflation cools, interest rates start to retrace, and inflationary pressures subside.
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