Apple stock (AAPL) - Get Apple Inc. Report Had an outstanding run in July 2022: up 18%. Most of the rally came in the last week, when the US Central Bank raised short-term interest rates by 75 basis points to 2.7 percent.
Wait a second, isnt monetary tightening supposed to be bad for stocks? Below, I explain why AAPL was a beneficiary of the last round of interest rate rises.
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Rising interest rates: when bad news is good news
The Federal Reserve has raised interest rates for a primary reason: to combat inflation. As much as high interest rates can affect economic growth, increasing consumer prices may affect the economy and the markets.
According to one hypothesis, investors have begun to applaud the Federal Reserve's efforts to reduce inflation. Chairman Jerome Powell has stated that he expects prices to gradually stabilize.
On the other hand, investors may appreciate that this round of interest rate hikes may be closer to the end than to the beginning. Because the equities market looks ahead several months when pricing stocks, the tone may finally shift to modestly bullish in the second half of 2022.
Lastly, Apple has been excellent in recent months, despite global economic stagnation 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 affected by reduced demand.
Apple is still likely to deliver the goods, even in an unfavorable macroeconomic situation, according to investors. This may explain why the S&P 500 has fallen about 15% this year, but the stock has remained unchanged at less than 10%.
Apple and its huge cash avalanche
Then, there is Apple's balance sheet. Companies that are more heavily leveraged may be affected by the increased cost of servicing their debt in a highly competitive environment. Higher interest paid means lower net income and earnings.
Apple has no such problem. The company has more cash and equivalents in its balance sheet than debt, which is about $70 billion more.
So, let's do the math: short-term interest rates have increased by 2.9 percent this year. Apply this rate to $70 billion, and the positive pretax impact on Apple adds up to $1.75 billion in net earnings, assuming a 15% tax rate.
Apple's cash stash suggests that rising interest rates may actually be beneficial to the company's financial assets. Not only is Apple still doing exceptionally well at its core operations, but it may now make even more money off its impressive balance sheet.
(Disclaimers: this is not investment advice. The author may be long one or more of the stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content.)