What happened
Big Tech Stocks Apple (AAPL 8.90%), Microsoft (MSFT 8.23%)and Intel (INTC 8.14%) all rose significantly today, exploding 6.2%, 6.6% and 5.5%, respectively, at 12:33 p.m. ET.
These are massive moves for companies this big, but today was no ordinary day. After essentially a year of negative surprises in the monthly Consumer Price Index (CPI) releases, with few exceptions, today’s CPI print came in below expectations, fueling hope a pause by the Federal Reserve in its aggressive interest rate hikes.
These tech giants each have at least partial exposure to the struggling PC industry, which has been one of the hardest-hit tech areas. While business spending on cloud and servers held steady, the prospect of further interest rate hikes or a recession had raised fears that another shoe could fall. Today’s release was therefore particularly positive, given that the sooner inflation falls, the sooner the Fed can stop raising interest rates and the greater the chance of avoiding a recession.
So what
Obviously, Apple and Microsoft make the two major operating systems for virtually every PC, and Intel’s biggest business segment is its PC processors. Consequently, each stock had seen a massive sell-off this year, despite its size, moat and relatively limited competition.
Of note, a technology research firm Gartner predicts third-quarter PC shipments fell 19.5% year-over-year — the biggest drop since it began tracking PC shipments in the 1990s.
So why is today’s CPI impression so important compared to PC sales? Well, rapid interest rate hikes tend to hit interest rate sensitive items first, which are usually expensive items like housing, automobiles, home electronics, and business fixed investments, which nowadays include data centers and enterprise PCs.
Add to that the fact that so many consumers bought new computers in the 2020-2021 period, and therefore might put off buying a new computer, and the rapid change in rates has resulted in a huge air pocket. in PC sales. Thus, the possibility of a pause in interest rate hikes could give expensive items a boost from their current severe downturn.
Apple has resisted much better than the others since it had fallen “only” by 23.6% this year, against 32.8% for Microsoft and 44.5% for Intel.
AAPL Year to Date Total Returns (Daily) data by YCharts
It’s somewhat surprising that Apple did better than Microsoft, given that consumer spending on electronics was thought to be generally lower than business spending. Microsoft’s More Personal Computing segment, which is focused on consumer PCs, video games and Bing digital advertising, accounts for only about 30% of the business, as opposed to Apple being primarily a consumer-oriented company , so it’s strange that Apple had held up better than Microsoft this year. The outperformance shows how strong the Apple brand is and how essential the iPhone is.
Intel really felt the pain of the PC slowdown this year because it had been the company’s cash cow. Intel’s new CEO Pat Gelsinger has ambitious plans to catch up Semiconductor manufacturing in Taiwan in advanced semiconductors by completing five node transitions in four years, while building a massive foundry ecosystem to serve third-party chip designers.
It’s incredibly difficult and very expensive to do, which is why the slump in PC sales has been so detrimental to Intel this year, as it robbed the company of the cash needed to execute its capital plans. That’s why Intel moved to a single-digit P/E ratio this year.
Given the bombardment these stocks have already suffered, and given that the market is looking to the future, it’s no surprise that they are tearing themselves away from the prospect of slowing inflation.
Now what
Given the lags with which the Fed’s economic policy operates, investors should know that if inflation is slowing, it is because the economy is also slowing. Over the next few months, the Fed will try to keep rates high enough to further calm inflation, without tipping the economy into a recession. Despite today’s rally, it’s still a tricky proposition.
A recession would be bad news for all stocks but these three stocks, especially Intel, since it is a capital-intensive hardware business.
On the other hand, today’s promising CPI release may allow the Fed to slow down or even halt its rate hikes. This would be good for all economically sensitive stocks, as long as the economy doesn’t slow down too much.
As is often the case, Apple and Microsoft still look like strong long-term core holdings, even despite this year’s declines. With Intel, an investment really hinges on your confidence in CEO Pat Gelsinger’s vision and ability to execute. If the turnaround works, Intel should have the most advantage of these three names; However, if all that spending doesn’t translate into strong returns or if Intel catches up to Taiwan Semi in cutting-edge technology, that could be a problem, even if Intel’s stock looks cheap today.
Billy Duberstein holds positions at Apple, Microsoft and Taiwan Semiconductor Manufacturing and has the following options: January 2023 short calls at $210 on Apple. Its clients may hold shares in the companies mentioned. The Motley Fool holds positions and recommends Apple, Intel, Microsoft and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Gartner and recommends the following options: January 2023 long calls at $57.50 on Intel, January 2025 long calls at $45 on Intel, March 2023 long calls at $120 on Apple, January short calls 2023 at $57.50 on Intel, short calls of January 2025 at $45 on Intel, and short calls of $130 on March 2023 on Apple. The Motley Fool has a disclosure policy.
