Apple stock (AAPL) - Get Apple Inc. Report had an outstanding run in July 2022: up 18%. Much of the rally came in the last week, after the US Central Bank increased short-term interest rates by 75 basis points to 2.5%.
But wait a second: isn’t monetary tightening supposed to be bad for stocks? Below, I explain why AAPL has been a beneficiary of the last round of interest rate hikes.
(Read more from Apple Maven: Apple Q3 Review: Delivering in Good and Bad Times)
Rising rates: when bad news is good news
There is a primary reason why the Federal Reserve has been raising rates in the US: to fight inflation. As much as high rates can hurt economic growth, rising consumer prices may be even worse for the economy and the markets.
One hypothesis is that investors have started to celebrate the Federal Reserve’s intervention to curb inflation. Chairman Jerome Powell himself said that he sees some signs of slowly stabilizing prices.
On the other hand, especially if inflation does come under control in the foreseeable future, investors may appreciate that this round of interest rate hikes may be closer to the end than to its beginning. Because the equities market looks ahead several months when pricing stocks, the tone could be finally shifting to modestly bullish in the second half of 2022.
Lastly, Apple has been executing superbly recently, even though global economic growth has been decelerating this year. In the company’s fiscal Q3 earnings call, CEO Tim Cook said that the iPhone at least, if not also the iPad and Mac, have not been suffering from reduced demand.
Investors may understand that, even in an unfavorable macroeconomic scenario, Apple is still likely to deliver the goods. This may explain why the S&P 500 has been down around 15% so far this year, but Apple stock has pulled back less than 10%.
Apple and its pile of cash
Then, there is Apple’s balance sheet. In a high interest rate environment, companies that are more heavily leveraged can suffer from the higher cost of servicing their debt. Higher interest paid means lower net income and EPS.
But Apple does not have this problem. The company has more cash and equivalents in its balance sheet than debt: about $70 billion more.
So, let’s do the math: short-term interest rates have risen 2.5 percentage point so far this year. Apply this rate to $70 billion, and the positive pretax impact to Apple adds up to $1.75 billion, or nearly 10 cents per shares in net earnings, assuming a tax rate of 15%.
Because Apple owns this pile of cash, rising rates can actually be good for the interest that the company earns on its financial assets. Not only is Apple still performing very well at its core operations, now the Cupertino giant can even make more money off its envious balance sheet.
(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 Apple Maven)