Stocks rallied to fresh highs yesterday as investors kept a weather eye on COVID but remained undaunted. Longer maturity Treasury yields skipped higher helping bank shares to rise and growthy growth stocks to fall.
N O T E W O R T H Y
The big AAPL. Yesterday was the first trading day of the first week of the first month… I guess that also makes it the first trading day of the new year. I would say that is as good a time as ever for the Dow and the S&P to log their first all-time high closes of the year. The remaining 250 trading days should be a cakewalk, right? You don’t have to answer that. Just smile, nod, and release a nervous chuckle. Also, a first yesterday was Apple’s briefly touching the $3 trillion market cap line. If Apple closed there, it would have been the first member of that exclusive club. The company ultimately closed with a market cap of $2.9861 trillion… not too shabby. It’s only a number and, of course, Wall Street has this thing with firsts and round numbers, usually distributing hats and T-shirts emblazoned with the achievements. They are usually packed away in far corners of closets and desk drawers only to see the light of day when new and bigger round ones are achieved. Their presentation is typically accompanied by a “remember when we thought blah blah blah was huge.” In the case of Apple, it was the first US company to hit the $1 trillion market cap marker. That achievement occurred in August 2018. Of course, it didn’t get there overnight. Apple’s IPO took place in December of 1980, so let’s call it 37 years and change.
August 2018 was a good month for stocks in general. The corporate tax benefits from The Tax Cuts and Jobs Act of 2017 were kicking in, helping companies show big jumps in earnings. Apple was able to show year over year EPS growth of +30%,+40%, and +41% for the first 3 calendar quarters, putting it on track to log a +25% EPS growth for the calendar year of 2018. That is impressive given that its calendar year EPS growth from the two prior years were +17% and -11% for 2017 and 2016, respectively. A key measure in the 2017 tax act enabled companies to repatriate earnings which were being tax sheltered in foreign countries. This left companies like Apple with an even more excessive amount of cash. So, Apple, like many other companies that year, used the cash to stage a massive $100 billion stock buyback, which was announced in May of 2018. Investors love stock buybacks which also serve to increase EPS. You know, when there is less “S” (shares outstanding) in EPS, which is calculated thusly: Earnings / Shares Outstand, the number goes up… basic math. Nonetheless the supercharged growth looks good to investors, and it typically helps stocks trade higher, which it clearly did in this case. Not too long after Apple hit that first momentous milestone, investors began to become nervous about FAANG (Facebook, Apple, Amazon, Netflix, and Google) stocks which, at the time represented some 10+% of the S&P500. The macro background included 4 year-to-date Fed rate hikes and a trade war between the US and China. Higher interest rates and tariffs were headwinds to economic growth which left equity indexes on tenterhooks by the end of the year. A Q4 selloff in stocks ensured that Apple didn’t enjoy its newly acquired achievement for too long. The S&P500 fell by nearly -14% while Apple lost -30.12% for the quarter. The market mayhem in the late days of 2018 combined with the global growth “headwinds” brought on by the trade war prompted the Fed to pivot to a dovish stance. Not only would the rate hikes stop, but rate cuts were soon to be initiated. And so they were, beginning in August of 2019. As the effects of the 2017 tax act wore off companies struggled to maintain EPS growth. This was referred to as an earnings recession, and Apple was not immune to it. EPS growth fell by -10% and -7% in the first 2 calendar quarters of 2019. An additional 2 rate cuts and a solid Q4 helped Apple close out the year on solid footing, allowing it to regain its $1+ trillion market cap. Then came the pandemic and along with it, a pullback in the stock price. The company’s market cap was still above the $1 trillion mark, despite the Q1 selloff. By Q4 of 2020 Apple had achieved a new milestone: a $2 trillion market cap, just 9 quarters after hitting the $1 trillion mark. The year that followed, 2021 was a good year in which Apple grew EPS by an astounding +58%. Yesterday, a little more than a year after Apple first achieved its $2 trillion market cap, the company achieved a $3 trillion milestone, if but for a brief moment.
42 years in the making, Apple is now on the verge of becoming a $3 trillion company. You may be wondering if the company is perhaps, overpriced given its recent moves. Apple is currently trading at a PE multiple of 32 and it is expected to have a PE just north of 31 in this upcoming year. That is slightly higher than the 25 PE from last summer, but still lower than the 36 PE it traded at in 2020. Prior to its landmark 2020 performance Apple’s 5-year average PE was around 18. Is there upside? If the PE stays where it is today and Apple achieves its 2023 estimated EPS of 6.17, that places the stock around $10 higher. If the multiple expands, it can go yet higher. Multiple expansion occurs when investors believe that a stock will outperform its growth estimates. Growth estimates for 2022 and 2023 are +2.4% and +7.5% respectively. Bearing in mind that EPS grew by +70.8% and +10.2% in the past two years, expansion is certainly possible. Finally, remember how the FAANGs dominated the weighting of the S&P500 back in 2018 with a 10+% combined weight? Today, Apple alone makes up nearly 7% of index. If we added Microsoft, the two make up some 13% of the index. I am left wondering when I will have to dig up the Apple hat I wore only once, on that day the company hit $2 trillion… which seems like just yesterday.
THE MARKETS
Markets traded higher yesterday as investors looked past the rising COVID numbers, expecting great things in the upcoming year. The S&P500 rose by +0.64%, the Dow Jones Industrial Average climbed by +0.68%, the Nasdaq Composite Index advanced by +1.20%, the Russell 2000 Index trader higher by +1.21%, and the S&P500 ESG Index added +0.83%. Bonds slipped and 10-year Treasury yields jumped by +11 basis points to 1.62%. Cryptos climbed by +1.14% and Bitcoin eased by -2.19%.
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