This has been a week for the bold and confident. Some might have been concerned about the FOMC meeting, when the US central bank was expected to turn more hawkish on monetary policy in the face of rising inflation. But on Wednesday, the Nasdaq jumped by over +2%.
Along for the ride was Apple stock (AAPL) - Get Apple Inc. Report, up nearly 3% on the day of Chairman Jerome Powell’s address to the public. Could shares of the Cupertino company continue to climb in the next days and weeks?
(Read more from the Apple Maven: Will Warren Buffett’s Conglomerate Trim Its AAPL Position?)
Fed rocks the markets
On Wednesday, the Federal Reserve made the following important announcements that shook the markets:
- The bank will half the pace of its asset purchase program compared to right before the start of the taper, to at least $40B per month in Treasury securities and at least $20B per month in agency mortgage-backed securities.
- Short-term interest rates will remain the same for now, at zero to 0.25% per year. However, as reported by CNBC, “the majority of Fed members forecast three interest rate hikes in 2022 to fight inflation”, which is an increase to previous estimates.
To be frank, none of the above should have caught investors by surprise. Further reduction in asset purchases and a more aggressive interest hike schedule next year were par for the course this time. However, asset prices moved as if none of it was expected.
The S&P 500 had been trading down modestly, at about -0.2%, right before the Fed’s end-of-day announcement. By the end of the trading session, two hours later, the benchmark had climbed +1.6%. Heading in the opposite direction, long-term treasuries sank -1%, probably as investors threw caution to the wind and loaded up on riskier, procyclical assets.
Apple stock’s reaction was even more impressive. From -0.8% at around 2 p.m. EST, AAPL ended the trading session higher by a whopping +2.9%. I estimate that another +1.1% day will be enough to send Apple past the $3 trillion market cap.
Can AAPL keep going?
The Wednesday rally probably had very little to do with Apple’s business fundamentals. The Fed’s more aggressive tapering and interest rate hike plans will probably do little, if anything at all, to increase demand for Apple’s products or services, for example.
Instead, the bullish attack was probably a quick relief rally that took some risk off the table. As inflation continues to rise, investors probably felt comfortable with the Federal Reserve taking more aggressive measures to, maybe, have a better grasp on consumer prices.
The bad news is that a spike in share prices that does not come along with an expected increase in earnings or cash flow means even heftier valuation multiples. According to Seeking Alpha, AAPL trades now at a next-year P/E of 29 times. To the best of my knowledge, this is the highest that this metric has ever been.
Driven mostly by improved sentiment, Apple could very well continue to climb on Friday, December 16, and even later in the month. But I don’t think this is a good enough reason for investors to accumulate more shares and increase their AAPL allocation.
I maintain my views of a couple of days ago: Apple stock is probably a great long-term holding. But following a dizzying rally against the tech-rich Nasdaq index in the past month or so, I think AAPL might need a little breather before it can climb much higher than $180 per share.
Apple stock failed to stay above the $3 trillion market cap on Monday, but it is fast approaching the milestone once again. How long until AAPL gets there?
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Apple Maven)