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Why Apple Stock Took A Big Hit on Fed Day

With interest rates climbing another 75 basis points, the broad equities market headed lower still. But why did Apple stock underperform the S&P 500? Here is what investors should know.

Recently, I wrote about Apple stock’s  (AAPL) - Get Apple Inc. Report outperformance vs. the S&P 500  (SPY) - Get S&P 500 ETF TRUST ETF Report. Over the past 3 months, shares of the Cupertino company have lavishly topped the returns of the US broad market benchmark, and it remains a winner year-to-date.

Despite AAPL being perceived as a higher quality stock that could weather the macroeconomic headwinds better than most others, it took a big hit on the day that the Federal Reserve announced its most recent 75-bp interest rate hike: -2.0% vs. SPY’s -1.7%. About $50 billion in Apple’s market cap vanished in a matter of a couple of hours.

Did the market overreact, or was there a good reason for AAPL to trail the index on September 21? And could this mean that Apple’s winning streak against the S&P 500 might be over? We take a closer look below.

Figure 1: Why Apple Stock Took A Big Hit on Fed Day

Read more from Apple Maven:Why Apple Stock Should Be A Winner This Week

Fed Day: what happened

First, it helps to understand what drove the markets on Wednesday. In a widely anticipated move, the US Central Bank increased the federal funds rate to a range of 3% to 3.25%.

Apple behaved very much like every other major stock in the S&P 500 and the index itself: (1) in positive territory ahead of the interest rate decision; (2) sharply lower at 2 p.m. EST; (3) back to session highs within a matter of minutes; (4) then sharply lower to end the day trading at the lows of the session. See the chart below.

Figure 2: AAPL vs. S&P 500 on September 21.

The interest rate decision was not a surprise, which at first made me scratch my head: why did equities sink in the first 10 minutes following the consensus-matching announcement? A bit more logical to me was the full intraday recovery, although it proved to be short-lived.

The second wave lower that started at 3 p.m. EST made more sense to me. During the press conference, Chairman Jerome Powell reinforced the idea that the Fed will do what it takes to regain control of consumer prices. That means increasing interest rates for as long and as aggressively as it is necessary.

The dot plot (see below) that shows each Fed member’s outlook on the direction of short-term interest rates suggested a hawkish view. Now, the Central Bank expects the interest rate to rise to 4.6%, on average, before they finally stabilize. The market did not like what it saw.

Figure 3: FOMC participants' assessments of appropriate monetary policy.

But why did AAPL underperform?

I would not read much into AAPL’s underperformance on Wednesday. First, the gap to the S&P 500, of about 30 basis points, was relatively small.

Most importantly, I do not think that Apple stands to lose more than other companies and stocks from this current environment of higher rates. Demand for Apple’s products and services shows no sign of softening, as we have discussed recently on this channel.

From a balance sheet perspective, higher rates can even be good news for the Cupertino company. Apple owns about $70 billion more in cash than it has in debt on the books. Higher rates mean higher interest income, to the tune of about $240 million in pretax profit for each 100-bp increase in rates (as I had estimated in a previous article).

Apple stock probably dipped more than the S&P 500 on Fed Day because it had more “fat to shed”. So far in 2022, AAPL has been down “only” 13% while SPY has returned to bear market territory (i.e. 20%-plus decline from the peak). Maybe investors looked at AAPL and saw an opportunity to lock in gains relative to the benchmark.

Whether Apple stock will underperform going forward is a tough question to answer. At least from a business fundamental perspective, I continue to see AAPL as a good buy-and-hold play in this environment of economic and market uncertainty.

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(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)