Short-Term Market Volatility Could Provide Long-Term Investing Opportunities
TLDRThis week's Investing Insights begins with a review of Apple's stock performance, where Morning Star remains optimistic for 2025 despite a weak start in 2024. The company's Q3 revenue aligned with Morning Star's forecast, and while iPhone revenue decreased, expectations are for growth by next year. Apple Services show strong revenue growth, and generative AI product announcements are anticipated to boost iPhone revenue. Morning Star has raised its estimate for Apple's stock value to $170 per share. Amazon's stock value is also reevaluated, with a new estimate of $193 per share. Eli Lilly's stock is raised to $540, reflecting its competitive advantage and pricing power. Medicare changes in 2024 are discussed, with a focus on the Inflation Reduction Act's impact on prescription drug costs, including a cap on insulin costs and expanded eligibility for financial assistance. The Federal Reserve's delay in interest rate cuts due to persistent inflation is also covered, with implications for stock and bond markets. The episode concludes with advice on long-term investment strategies amidst short-term market volatility, suggesting that current market conditions could present buying opportunities.
Takeaways
- 🍎 Apple stock has had a weak start in 2024, but Morning Star is optimistic about a turnaround in 2025, with improved iPhone revenue growth expected after generative AI product announcements.
- 📈 Morning Star has raised its estimate for Apple's stock worth to $170 per share, up from $160, considering the strong first quarter results and potential for growth.
- 📊 Amazon's stock value is estimated to be $193 per share by Morning Star, up from $185, with growth driven by online stores, advertising, and Amazon Web Services, and a potential boost from generative AI adoption.
- 💊 Eli Lilly's first quarter exceeded expectations, with pricing power of its diabetes drug a significant factor. Morning Star has increased its stock value estimate to $540 from $500.
- 💰 Medicare changes in 2024, as part of the Inflation Reduction Act, include a cap on insulin costs at $35 per month, free Part D qualified vaccines, and a cap on out-of-pocket costs at about $3,300 annually.
- 🧊 The Federal Reserve is likely to delay interest rate cuts as inflation remains high, which could impact the stock market and present long-term opportunities for investors.
- 📉 Market volatility in the short term, due to the potential for fewer interest rate cuts, may lead to a market reset that could benefit investors by allowing valuations to return to healthier levels.
- 💵 For fixed income investors, higher interest rates mean higher yields, but less price appreciation for bond holdings. Bonds can act as a diversifier in a portfolio, especially if stocks face a downturn.
- 👵 The expanded eligibility for financial assistance for low-income seniors under Medicare can help with premiums and costs, with the 'Extra Help' program potentially covering all costs for qualifying individuals.
- 💊 New drug price negotiations between Medicare and pharmaceutical companies are underway, aiming to reduce costs for expensive medications.
- 📚 Awareness of Medicare changes is low, but these changes could significantly impact seniors' finances, especially for those on expensive drugs, with caps on out-of-pocket costs reducing financial burdens.
Q & A
What is the current outlook for Apple stock according to Morning Star?
-Morning Star is optimistic about Apple's prospects for 2025. Despite a weak start to 2024 and a decline in iPhone revenue, they anticipate improvements in iPhone revenue growth by next year. However, Apple is expected to face challenges from increased domestic competition in China and slowing iPhone refresh cycles globally. Morning Star has raised its estimate of what Apple stock is worth to $170 per share from $160 per share.
Why does Morning Star believe Amazon's stock has room for growth?
-Morning Star believes there is room for more growth in Amazon's stock due to the company's best-ever operating profit of $15.3 billion. The growth is attributed to online stores, advertising, and Amazon Web Services. Additionally, the adoption of generative AI is expected to contribute significantly to Amazon's revenue, with management suggesting it could add tens of billions of dollars to revenue over the next several years. Morning Star estimates Amazon's stock to be worth $193 per share, up from $185.
What factors are driving Eli Lilly's growth?
-Eli Lilly's growth is primarily driven by the pricing power of its diabetes drug, Mounjar, which has supported much of the pricing gains. Sales of GLP-1 and related drugs remain key to the company's growth, with Morning Star expecting sales to top $60 billion. The strong efficacy of Mounjar and the weight loss drug, Zbend, along with supply constraints and a lack of significant competition, give Eli Lilly pricing power and drive sales and margins higher.
How are changes in the Medicare program affecting prescription costs for seniors?
-The Inflation Reduction Act has brought significant changes to the Medicare Part D prescription drug program. These changes include a cap on insulin costs at $35 a month, free Part D qualified vaccines, a cap on out-of-pocket costs at about $3,300 a year, and penalties for drug companies that increase their prices above the rate of general inflation. Additionally, eligibility for financial assistance for low-income seniors has been expanded, and new drug price negotiations are underway between Medicare and pharmaceutical companies.
What is the current state of interest rates and how might they affect the stock market?
-Interest rates are likely to remain higher for longer as inflation continues to run hot. Initially, the market predicted several interest rate cuts in 2024, but due to unexpectedly elevated inflation, it now appears there may only be one or two cuts, or possibly none at all. High interest rates can negatively impact the stock market as they increase the cost of borrowing, affect balance sheets, and reduce profits, making investors nervous.
How could fewer interest rate cuts benefit investors?
-Fewer interest rate cuts could benefit investors by providing a market reset, allowing valuations to return to healthier levels. While short-term volatility can be concerning, strong earnings, economic growth, and a robust labor market indicate that the bull market is not over. Analysts suggest that a pause in the bull run could be positive, giving the market time to digest recent gains and present a buying opportunity for investors with cash on the sidelines.
What is the prediction for the bond market and what should fixed income investors consider?
-Higher interest rates generally mean higher yields for bond investors, which is the income part of fixed income. However, it also means that bond investors could see less price appreciation for their bond holdings. In an environment where stocks are doing well, bonds can act as a portfolio diversifier, which would be a positive development. Fixed income investors should consider the potential for bond prices to rise and help cushion a portfolio against stock market shocks.
What is the key takeaway for investors regarding market volatility?
-The key takeaway for investors is to not let short-term market fluctuations derail their long-term investment strategy. Volatility is a normal part of investing, and it's important to construct a portfolio that can withstand it at a level the investor is comfortable with. For those with cash on the sidelines, short-term pullbacks in the market could present buying opportunities in both stock and bond markets.
How does the new spending cap on out-of-pocket costs for Medicare Part D affect seniors financially?
-The new spending cap on out-of-pocket costs for Medicare Part D, currently at $3,300 a year and set to fall to $2,000 next year, significantly affects seniors financially by limiting their maximum out-of-pocket expenses for prescription drugs. This is particularly beneficial for seniors taking expensive drugs, as it can reduce their overall drug costs from potentially thousands of dollars to the capped amount, plus their premium.
What is the 'Extra Help' program and how does it assist low-income seniors with Medicare costs?
-The 'Extra Help' program is a federal program designed to assist low-income seniors with their Medicare prescription drug plan costs, including premiums, deductibles, and co-payments. Qualification for the program is based on income and resource levels. If eligible, the program can cover most or all of these costs, providing significant financial relief to those who qualify.
What is the significance of the drug price negotiations between Medicare and pharmaceutical companies?
-The drug price negotiations between Medicare and pharmaceutical companies are significant as they aim to lower the cost of expensive drugs for seniors. The outcome of these negotiations could potentially lead to reduced drug prices, which would directly benefit Medicare recipients by lowering their out-of-pocket expenses on medications.
How does the cap on insulin costs at $35 a month impact diabetic seniors on Medicare?
-The cap on insulin costs at $35 a month is particularly impactful for diabetic seniors on Medicare as it significantly reduces their monthly expenses for this vital medication. This change can be a financial lifeline for those who previously had to pay much higher amounts out-of-pocket for their insulin, thus improving their ability to manage their diabetes effectively.
Outlines
📈 Apple's Outlook and Stock Performance
The first paragraph discusses the outlook for Apple's stock in 2024. Morning Star is optimistic about Apple's prospects for 2025 despite a weak start to 2024. The company's March quarter revenue aligns with Morning Star's forecast, but the June quarter outlook fell short. iPhone revenue, which is Apple's primary driver, has decreased, yet improvements are anticipated for the next year. Challenges are expected due to increased domestic competition in China and slower refresh cycles globally. Apple Services have shown strong revenue growth, but a lack of updates on generative AI has impacted share performance. Morning Star expects product announcements over the summer to boost iPhone revenue growth in 2025 and has raised its estimate of Apple's stock value to $170 per share.
💊 Medicare Changes and Pharmaceutical Insights
The second paragraph focuses on changes in Medicare for 2024 and the impact on prescription costs. The Inflation Reduction Act has led to significant changes in the Part D Medicare prescription drug program, particularly for those facing high drug costs. The act has capped insulin costs at $35 a month, made Part D qualified vaccines free, and introduced a cap on out-of-pocket costs at $3,300 annually. It also penalizes drug companies for price increases above the general inflation rate and has expanded financial assistance for low-income seniors. Furthermore, there are ongoing negotiations between Medicare and pharmaceutical companies over the cost of expensive drugs, and the out-of-pocket cost cap will be reduced to $2,000 in the following year, providing relief to seniors with high drug expenses.
📉 Market Volatility and Interest Rates
The third paragraph addresses the Federal Reserve's delay in interest rate cuts amidst high inflation. Initially, the market predicted several interest rate cuts in 2024, but due to persistently high inflation, these expectations have diminished. This has led to market volatility, which could present long-term opportunities for investors. Despite the higher interest rates, strong earnings, economic growth, a robust labor market, and consumer spending continue. Analysts suggest that a market reset could allow valuations to return to healthier levels. For bond investors, higher rates mean higher yields, but less price appreciation is expected. The key takeaway is to maintain long-term investment strategies despite short-term market fluctuations, and for those with cash on the sidelines, current market conditions could present buying opportunities.
🎬 Investing Insights Show Credits
The fourth paragraph serves as the closing credits for the Investing Insights show. It thanks the viewers for watching and appreciates their support. The paragraph also credits the production team, including the senior video producer, lead technical producer, associate multimedia editor, and editor, before signing off with a musical and applause segment.
Mindmap
Keywords
💡Volatility
💡Apple Stock
💡Federal Reserve
💡Inflation
💡Morning Star Inc
💡Amazon Stock
💡Eli Lilly
💡Medicare
💡Interest Rates
💡Generative AI
💡Portfolio Diversification
Highlights
Morning Star is optimistic about Apple's outlook for 2025 despite a weak start in 2024.
Apple's March quarter revenue was just over $99 billion, aligning with Morning Star's forecast.
Morning Star anticipates improvements in iPhone revenue growth by next year but increased domestic competition in China could pose challenges.
Apple Services continue to show strong revenue growth, with generative AI product announcements expected to drive further growth.
Morning Star has raised its estimate of Apple stock's worth to $170 per share from $160 per share.
Amazon's operating profit reached a record high of $15.3 billion, with growth from online stores, advertising, and Amazon Web Services.
Morning Star believes Amazon could gain significantly from the adoption of generative AI, with potential revenue additions in the tens of billions.
Eli Lilly's first-quarter performance exceeded expectations, with pricing being the main driver of its growth.
Sales of GLP-1 and related drugs remain key to Eli Lilly's growth, with expected sales to top $60 billion.
Morning Star has raised its estimate for Eli Lilly stock to $540 from $500, noting the shares appear overvalued.
Medicare changes in 2024 include a cap on insulin costs at $35 per month and free Part D qualified vaccines.
The Inflation Reduction Act has introduced significant changes to the Medicare Part D program to protect against high drug costs.
Out-of-pocket costs for Medicare Part D enrollees are capped at $3,300 annually, with further reductions to $2,000 expected next year.
Drug companies face penalties if they increase prices above the rate of general inflation.
Low-income seniors are now eligible for expanded financial assistance to help with premiums and costs.
Interest rates are likely to remain higher for longer as inflation continues, impacting stock market performance.
Analysts suggest that short-term market volatility could present long-term opportunities for investors.
Fixed income investors may see higher yields due to higher interest rates, although bond price appreciation may be less.
Investors are advised not to let short-term market fluctuations derail their long-term investment strategies.
Strategists indicate that short-term market pullbacks could be buying opportunities in both stock and bond markets for investors with available cash.