The Federal Reserve's latest 75-basis-point interest rate hike sent another shockwave through the stock market, ramping up worries among investors about inflation and possible recession.
The benchmark federal funds rate now ranges between 3% and 3.25% (the highest since 2008). Fed officials admit further hikes could come this year, estimating that the benchmark rate could hit 4.4% by the end of 2022, and rise to 4.6% sometime in 2023. The central bank is optimistic that inflation will decelerate next year, increasing 2.8% overall in 2023 as compared to an estimated 5.4% overall rise in 2022.
If interest rate hikes do ease, the stock market may calm a bit next year. This probably explains why investment banker Stifel Financial forecasts the S&P 500 will rally to 4,400 points in the first quarter of 2023. That would represent a 19% upside from the current levels, with Stifel estimating that the stock market may start rallying in November.
If Stifel's forecast holds true, now may be a good time for investors to start accumulating shares in some beaten-down companies. Stifel advises that investors buy big tech stocks to position themselves for a potential rally. Two tech stocks, Apple (AAPL 0.52%) and Advanced Micro Devices (AMD 1.33%), are down so far in 2022 but could rally in the event of a bull market.
1. Apple looks set to finish the year on a high note
Apple's stock price is down 15% in 2022 and that has made the stock relatively cheaper than last year. Shares of Apple trade at 25 times trailing earnings, lower than 2021's price-to-earnings ratio of 31. Investors may want to grab this opportunity to buy Apple at this attractive valuation since it has the potential to surge higher if it performs well in the holiday season.
Surging inflation may temper consumer spending this holiday season. Still, analysts at Deloitte estimate that holiday sales will increase between 4% and 6% as compared to the prior year. What's more, e-commerce sales are expected to increase between 12.8% and 14.3%.
Higher consumer spending this holiday season could give the smartphone industry a boost following a torrid time so far in 2022. This could be good news for Apple, whose iPhone has defied the weakness in the smartphone industry this year thanks to upgrades by existing customers and a switch to the iOS ecosystem by erstwhile Android customers.
It appears that customers have already taken a liking to Apple's new iPhone 14 lineup, especially the higher-priced Pro models. The company has reportedly asked its manufacturing partners to increase the production of the iPhone 14 Pro and the iPhone 14 Pro Max to meet the healthy demand, a move that's likely to bump up the average selling price of the new devices. As it turns out, the iPhone 14 Pro Max reportedly has the longest delivery time of any iPhone released in the past six years.
The solid demand for Apple's iPhone 14 models isn't surprising. Wedbush analyst Daniel Ives estimates that around 240 million iPhones haven't been upgraded in the past three and a half years. Upgrades to the latest iPhones by this huge installed base could help Apple finish the year positively and carry the momentum into 2023.
Apple's growing share of the global smartphone market will be another tailwind. The share of Android smartphones slipped to 70%, compared to 77% in 2018. iPhones now command 25% of the global smartphone market, up from 20% in 2018.
All this indicates that Apple could see increases in iPhone shipments once again in the final quarter. The company reportedly asked suppliers to prepare to produce 95 million iPhone 14 units in 2022, up from 80 million units during last year's holiday quarter. Throw in a potential increase in the average selling price, and it won't be surprising to see Apple's revenue in the fiscal first quarter of 2023 (which ends in December) surpass the $128 billion analyst estimate.
The company's stronger-than-expected results could send its shares soaring, especially in the event of a bull market.
2. AMD is too cheap to ignore given its impressive growth
AMD is another stock that's likely to rally impressively in a bull market, as investors pile into a stock with a cheap valuation and eye-popping growth. The stock trades at 29 times trailing earnings, way below its five-year average earnings multiple of 101. The forward earnings multiple of just 14 points toward a big bump in AMD's bottom line.
All that isn't surprising considering AMD's terrific growth. The growing demand for the company's chips, which power data centers, computers, and gaming consoles, could help it exit 2022 with a 60% spike in revenue to $26.3 billion, according to the company's own estimate. The bump in consumer spending discussed above could prove to be a nice tailwind for AMD as well.
For instance, sales of gaming consoles could pick up this holiday season. Sony is ramping up the production of the PlayStation 5 console significantly to ensure greater availability of stock. Similarly, Valve bumped up the production of the Steam Deck handheld to meet the healthy customer demand. Both Valve's and Sony's consoles are powered by AMD's semi-custom processors, and an increase in their production would give the chipmaker a nice shot in the arm.
Microsoft, another AMD customer using semi-custom chips in its latest Xbox consoles, expects console demand to outpace supply again this holiday season. On the other hand, the launch of AMD's latest Zen 4 central processing units in time for the holiday season could help boost its share in the PC processor space.
As sales of video games and related hardware historically peak during November and December, AMD seems well placed to finish the year on a high. A strong set of results next month coupled with an upbeat outlook could create the perfect background for AMD to rally strongly in case a bull market does begin, which is why buying the stock at its current valuation could turn out to be a prudent move.
