What’s Going on With Apple, Tesla, and Alphabet?

Ivanna Hampton: Here’s what’s ahead on this week’s Investing Insights. We’re spotlighting three of the “Magnificent Seven” stocks. Why are two are trailing the pack, and when will one pay its first dividend? Plus, what Morningstar thinks is Boeing’s future, as the airplanemaker recovers from past mistakes. And, any signals from the Fed? Morningstar’s senior US economist will weigh in and share his economic outlook. This is Investing Insights.

Welcome to Investing Insights. I’m your host, Ivanna Hampton. Let’s get started with a look at the Morningstar headlines.

Alphabet’s First Dividend

Alphabet will join other Magnificent Seven stocks like Meta and Nvidia and pay a dividend. Shareholders are set to receive their first quarterly payment on June 17. Meanwhile, Alphabet reported a strong first quarter. The tech giant’s total revenue increased 15% year over year versus 13% last quarter. That continued the acceleration of the past year. While growth likely won‘t maintain this quarter’s pace, Alphabet’s results position it to exceed Morningstar’s expectations for the year. Search advertising, YouTube advertising, and the cloud business delivered impressive growth. Like Meta, Alphabet is prioritizing its AI technology. Alphabet is also setting the expectation that capital investment will likely continue at its current pace, reaching nearly $50 billion. However, the company is cutting jobs and consolidating teams to trim costs to blunt the impact on profits. Morningstar thinks Alphabet shares are worth $179, up from $171. Shares look fairly valued.

Boeing’s Focused on Recovering From Past Mistakes

Boeing’s first quarter focused on recovering from past mistakes. Boeing CEO David Calhoun says the airplanemaker is asserting control over its manufacturing discipline. And the Federal Aviation Administration’s mandate to publish a safe manufacturing plan by late May also prompted the action. Losses in the quarter reflected necessary slowdowns at the company’s 737 factory. However, Morningstar believes Boeing can meet its analyst’s 2024 forecast if the airplanemaker gets the plant running and delivers existing jets in the back half. Calhoun emphasized Boeing’s primary goal of ensuring that only nonfaulty parts from Spirit AeroSystems make it to the final assembly process. This is in response to previous disruptions due to defective parts. Morningstar raised its estimate for what Boeing’s stock is worth by $2 to $221. Shares look undervalued.

General Motors’ Strong Start to 2024

General Motors had a strong start to 2024. Morningstar thinks it’s a good sign for the rest of the year. GM’s first-quarter earnings per share rose almost 19% over this time last year. Management raised its 2024 earnings outlook on the back of the strong performance. The automaker also increased its expectations for adjusted earnings before interest and taxes. Management predicts between $12.5 billion and $14.5 billion for the year. That’s a $500 million increase from earlier expectations. The automotive industry is recovering from a global chip shortage. The recovery has caused falling prices across the industry, but GM’s higher US production has offset the negative effects. GM North America’s high production volume also offset lower international volumes for the quarter. Morningstar thinks GM’s stock is worth $84 and very undervalued.

The Magnificent Seven Stocks’ Divergence

A couple of mega-cap tech stocks’ membership in the so-called “Magnificent Seven” is coming into question. Both Apple’s and Tesla’s stocks have struggled this year. So, why are they falling behind the pack? Morningstar Inc.’s markets reporter, Sarah Hansen, has investigated this. Welcome back to the podcast, Sarah.

Sarah Hansen: Thanks so much. Great to be here.

Apple’s Fallen From Last Year’s Rally

Hampton: Apple and the rest of the Magnificent Seven drove last year’s market rally, but Apple’s stock has fallen since then. Talk about what’s going on.

Hansen: Sure. So we’ve seen a big shift in this group of stocks known as the Magnificent Seven, which is Nvidia, Tesla, Meta, Apple, Amazon, Microsoft, and Alphabet. These stocks kind of moved in lockstep and drove a huge chunk of the stock market’s return last year, but they’ve been steadily diverging over the last couple of months, and Apple is one of those that’s falling behind the pack and that’s because of slowing growth and declining iPhone sales. IPhones are a huge part of Apple’s business, and slowing sales, especially in China, are putting a dent in the stock’s growth. Investors are also kind of anxious about regulatory concerns, both in Europe and the United States. So, when you take all that together, you have Apple stock has become one of the biggest detractors from the returns of the total market this year so far.

How Apple Could Reverse the Slide

Hampton: How could Apple reverse this slide?

Hansen: For Apple, it all comes down to growth. A pickup in iPhone sales next year, or in the next year, could give investors a lot of confidence. There’s also, for Apple, a pretty big AI angle. Developments in artificial intelligence have pushed other members of the Magnificent Seven, like Nvidia, like Microsoft, a lot higher this year, and investors have kind of worried that Apple is falling behind the pack a little bit. And a major AI announcement in the coming months, in the coming year, could really help turn things around for Apple stock.

Why Investors Are Changing Their Minds About Tesla

Hampton: Let’s shift to Tesla. It looks like investors are resetting their expectations. Can you describe what’s causing them to change their minds?

Hansen: For a lot of this year, Tesla has faced kind of the same issue that Apple has, and that’s slowing growth. We’ve had reports of fewer deliveries. We’ve also had a lot of negative headlines surrounding scrapped projects, and that has had investors really recalibrating their expectations when it comes to Tesla, and we’ve seen the stock down as much as 30% for the year. We’ve reversed some of those losses a little bit this week after news broke that the company had cleared some big regulatory hurdles in China.

Morningstar’s Outlook for Tesla

Hampton: And what’s Morningstar’s outlook for Tesla?

Hansen: Right now, Morningstar analysts see Tesla as fairly valued. They still see growth prospects for the company, especially given that recent news in China. Our analysts have also said the company can benefit from shifting its focus a little bit away from growth and toward more steady profitability. That would definitely make markets very happy. But the big thing for investors to remember about Tesla is that it’s a very volatile stock with a very uncertain outlook. Things can change very quickly for Tesla based on news headlines and on the company’s own fundamentals.

Hampton: Thanks, Sarah, for explaining what’s happening with Tesla and Apple today.

Hansen: Absolutely.

Higher Interest Rates Stick Around

Hampton: Higher interest rates are sticking around for longer. While Fed Chair Jerome Powell didn’t seem worried about the inflation outlook, he seemed to make it clear that rate cuts will have to wait. So, what should investors expect? Preston Caldwell is a senior US economist for Morningstar Research Services.

Thanks for being here, Preston.

Preston Caldwell: Thanks for having me, Ivanna.

Hampton: Before getting into Powell’s press conference, let’s talk about why inflation increased in the first quarter.

Caldwell: So just going back, in the second half of 2023, we saw inflation running at about a 2% rate, right back to the Fed’s 2% target. But then in the first quarter, core PCE inflation, which is the Fed’s preferred measure, accelerated to 3.7% quarter-over-quarter annualized. That was driven partly by an uptick in durable goods inflation, as well as financial-services inflation. And also housing inflation, it didn’t increase, but it didn’t demonstrate the reduction that was anticipated by many investors. So those all caused inflation to jump to a new high in the first quarter, or the highest level in about a year. And that essentially has dashed market expectations of rate cuts happening in early 2024. If we go back to the beginning of 2024, market participants had expected rate cuts to happen as soon as March of this year. And now they’re not expecting them to happen until September. Now, our view is that the drivers of the inflationary uptick in the first quarter are unlikely to repeat over the rest of the year. And so, we should see inflation to resume its progress back to the Fed’s 2% target over the rest of this year and beyond.

Hampton: Now, Powell says the data has not given the Fed greater confidence. Has the clock reset on plans to cut interest rates?

Caldwell: Interest-rate cuts are still very much in the cards, more than anything because rates are at currently restrictive levels. The federal-funds rate is in a target range of 5.25% to 5.50%, which is much above the kind of 2% to 3% range of interest rates that the Fed would expect to prevail in normal times. So, if we do get inflation back to 2%, which should happen by our expectations and by the Fed’s expectations with rates being where they’re at, then hitting the Fed’s inflation target will call for lowering the federal-funds rate quite steeply. And then, of course, if we see weakness in terms of economic activity or the job market, then that would just add further reason to bring interest rates down. So, we’re actually ultimately expecting the federal-funds rate to fall still to a target range of 1.75% to 2.00% by year-end 2026. Now, that is a long time frame. So, we’re still looking at a period where interest rates will likely remain high for the time being, with the first federal-funds rate cut not coming probably now until September of 2024.

Hampton: Now, while rates were left unchanged, the Fed did announce a change to its policy for reducing its bond holdings, otherwise known as quantitative tightening. What do investors need to know?

Caldwell: This was something that the Fed had discussed earlier, but then markets had thought that perhaps the Fed would put these plans on hold given the inflationary uptick and the delay in rate cuts, but the Fed decided to go ahead and proceed with this which was—right now, the Fed is selling off its long-term asset portfolio. The rate of a balance-sheet runoff is capped at about $95 billion per month. That cap is being reduced to $60 billion per month in combined Treasury and other security sales. So, basically, a very large reduction in the rate of those asset sales, which the fact that the Fed will sell fewer of those assets going forward is helping to support asset prices. In other words, long-term Treasury yields have dropped somewhat, I think based off that news. We see the 10-year Treasury yield was down about 5 basis points today, and that probably reflect the reduced pace of asset sales announced by the Fed.

Hampton: And talk about how higher-for-longer interest rates affect people with credit card debt or shopping for mortgages.

Caldwell: The fact that the Fed is postponing rate cuts and just the prospects that wherever rates ultimately settle back down at could be higher than previously anticipated has altogether combined to drive the 10-year Treasury yield up from about 4% at the beginning of this year to 4.6% as of today. That 10-year Treasury yield means higher borrowing rates for any longer-term fixed-rate borrowers. That’s meant higher mortgage rates. Now credit card debt tends to be tied to short-term interest rates, so not so much affected, although insofar as the federal-funds rate remains high, then credit card borrowers are continuing to—and other short-term rate borrowers are continuing to—pay very high rates. But really, I mean, mortgage rates are probably the area where people see the biggest impact, where there’s a huge increase in the monthly payment that you’re going to incur taking out a 30-year mortgage.

I think most homebuyers right now are really buying on the promise and hope that they can refinance a few years down the line, and that’s contingent on the Fed cutting rates quite aggressively, actually. If you’re going to achieve a 30-year mortgage rate below 5%, let’s say, not to mention the 3% to 4% that we had just a few years ago and was prevailing prior to the pandemic, the Fed is actually going to have to cut even more than markets are anticipating right now. So that’s a big reason why we think the Fed will ultimately cut more than markets expect is because we think much lower mortgage rates are going to be needed to drive a sustained recovery in the housing market, because at some point, homebuyers are going to lose hope that they’ll be able to refinance down the line, and they’re just not going to put up with these high mortgage rates for any longer.

Hampton: Preston, thank you for your insights today.

Caldwell: Thanks for having me, Ivanna.

Hampton: That wraps up this week’s episode. Subscribe to Morningstar’s YouTube channel to see new videos about investment ideas, market trends, and analyst insights. Thanks to Senior Video Producer Jake VanKersen, Lead Technical Producer Scott Halver, Associate Multimedia Editor Jessica Bebel, and Editor Margaret Giles. And thank you for watching Investing Insights. I’m Ivanna Hampton, lead multimedia editor at Morningstar. Take care.