The recent Fed-induced selloff in technology stocks has prompted traders to deploy customary crisis management strategies, yet seeking shelter in Apple Inc, a typically favored tactic, is exhibiting signs of vulnerability as the tech behemoth’s stock confronts challenges. Despite this, Apple’s intrinsic qualities, such as its robust balance sheet and resilient revenue streams, continue to draw investors, positioning it as a potential winner if economic conditions deteriorate further.
Over the past few weeks, Apple’s stock has failed to live up to its reputation as a haven. Concerns about China’s economic situation and recent growth trends, exacerbated by central bank policies contributing to the broader tech sector’s correction, have caused Apple to shed nearly $240 billion in value this month alone. Since the end of July, Apple’s stock price has declined by 12%, in stark contrast to the Nasdaq 100 Index’s 5.8% drop during the same period.
Jack Ablin, Chief Investment Officer at Cresset Capital, emphasized Apple’s strengths, stating, “It has a lot going for it in this environment: it is gigantic, offers pretty predictable growth and cash flow in an uncertain world, and it is a very high-quality company that doesn’t have much debt. Its fundamentals are so solid that it is basically the Treasury of the equity market.” On Friday, Apple’s stock managed to rise by 1%.
Ablin believes that Apple could outperform the market if it continues to struggle, citing previous instances such as the Silicon Valley Bank collapse earlier this year and the Federal Reserve’s response to high inflation last year, which triggered widespread tech sector selling.
Data compiled by CFRA revealed that Apple has outperformed the S&P 500 Index in 64% of market corrections, with an average decline of just 7%, significantly lower than the benchmark index’s 14.6% average drop. In contrast, the broader S&P 500 tech sector has only outperformed in 30% of market corrections.
However, in the current correction, Apple’s weak momentum has contributed to the S&P 500 tech sector entering correction territory and has prompted Ned Davis Research to lower its view on big tech stocks.
The Apple stock took a hit amid the fed-induced selloff as the Federal Reserve’s signal of prolonged elevated interest rates sent the 10-year Treasury yield to its highest point since October 2007, intensifying the market downturn. This shift in policy stance has put pressure on tech sector multiples and raised concerns about an impending recession.
In response, Chris Haverland, a global equity strategist at the Wells Fargo Investment Institute, advises investors to prioritize resilience and maintain a quality bias in their portfolios, given the likelihood of an economic recession in the coming quarters. Large-cap U.S. stocks, he notes, exhibit superior characteristics like profitability, earnings stability, and balance-sheet strength.
Apple checks many of these boxes, boasting favorable attributes relative to its peers, including profitability, growth, revisions, leverage, and volatility, according to Bloomberg’s data. It lags behind in just two areas: value and its valuation relative to historical averages, although the recent decline in its stock price has mitigated some of that risk. Currently, Apple trades at around 26 times estimated earnings, near its lowest multiple since April but still above its long-term average.
Sam Stovall, Chief Investment Strategist at CFRA, highlights the resilience of high-quality stocks during challenging periods, asserting, “Apple really embodies the quality theme, with its cash flow, buybacks, and balance sheet.”
Investors’ comfort with Apple is further reflected in the CBOE Apple VIX, which tracks future volatility estimates for the stock, having dropped 33% this year and now standing below its 10-year average. The CBOE NDX Volatility Index has similarly decreased by 22% this year.
Despite these positive indicators, concerns linger over Apple’s reliance on the Chinese market and its comparatively modest growth prospects in comparison to peers like Microsoft Corp. or Nvidia Corp. As a result, only 67% of analysts tracked by Bloomberg recommend buying Apple’s stock, marking one of the lowest ratios among mega-cap tech stocks.
Dennis Dick, Head Trader at Triple D Trading Inc., points out the potential risks, saying, “A lot of people hide out in Apple, on the idea that its cash flows are so reliable it’s safer. However, a lot of tech got very overbought, and if momentum breaks, then safety trades stop looking safe.”
In conclusion, the Fed-induced selloff has underscored the evolving dynamics within the tech market, challenging the traditional safe haven status of Apple and prompting investors to reassess their strategies in this volatile landscape.
Source: Bloomberg
