Short-Term Market Volatility Could Provide Long-Term Investing Opportunities

This week's Investing Insights begins with an optimistic outlook for Apple's stock in 2025 despite a weak start in 2024. Morning Star has revised its valuation of Apple stock upwards to $170 per share, anticipating improved iPhone revenue growth driven by generative AI product announcements. Amazon's stock value is also raised to $193 per share, reflecting continued growth in online stores, advertising, and Amazon Web Services. Eli Lilly's strong first quarter results lead to an increased stock valuation to $540, although the company's growth is expected to decelerate later in the year. Mark Miller discusses significant Medicare changes in 2024, including spending caps and expanded federal assistance for low-income seniors. The Federal Reserve's delay in interest rate cuts due to persistent inflation has caused market volatility, which Sarah Hansen suggests could present long-term opportunities for investors. The episode concludes with advice to maintain long-term investment strategies despite short-term market fluctuations.

Takeaways

• 🍎 Apple's stock had a weak start in 2024, but Morning Star is optimistic about 2025, with expected improvements in iPhone revenue growth.
• 📉 Despite a decline in the March quarter revenue, Apple Services show strong revenue growth, and generative AI product announcements are anticipated to boost iPhone revenue next year.
• 📈 Morning Star has raised its estimate of Apple's stock worth to $170 per share from $160, considering the first quarter results.
• 🛒 Amazon's stock value is seen rising to $193 per share from $185, with growth from online stores, advertising, and Amazon Web Services, and potential gains from generative AI adoption.
• 💊 Eli Lilly had a better-than-expected first quarter, with pricing being the main driver of its growth, particularly the diabetes drug Mounjar, which solidifies its competitive advantage.
• 💰 Morning Star expects Eli Lilly's sales to top $60 billion, given the strong efficacy of its drugs and the lack of significant competition.
• 💊 Medicare changes in 2024 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 for seniors.
• 📉 The Federal Reserve is likely to delay interest rate cuts as inflation remains high, impacting the stock market and investor expectations.
• 📈 Short-term market volatility could present long-term opportunities for investors, as a market reset may lead to healthier valuations.
• 💵 Fixed income investors may benefit from higher yields due to increased interest rates, although bond price appreciation may be less.
• 🚨 Investors are advised not to let short-term market fluctuations derail their long-term investment strategy and to consider short-term pullbacks as potential buying opportunities.

Q & A

What is the outlook for Apple stock according to Morning Star for 2025?

Morning Star is optimistic about Apple's outlook for 2025. They anticipate improvements in iPhone revenue growth and expect Apple to make generative AI product announcements over the summer, which should drive improved iPhone revenue growth next year. Morning Star has raised its estimate of what Apple stock is worth to $170 per share from $160 per share.

Why has Apple's share performance been affected this year?

Apple's share performance has been affected due to a lack of updates about generative artificial intelligence. However, Morning Star expects product announcements related to generative AI over the summer to boost the stock.

What is the current status of Amazon's stock according to Morning Star?

Morning Star has raised its estimate of what Amazon's stock is worth to $193 per share from $185, following Amazon's best ever operating profit of $15.3 billion. The company's growth is attributed to online stores, advertising, and Amazon Web Services, with artificial intelligence contributing significantly to the latter's growth.

How did Eli Lilly perform in the first quarter?

Eli Lilly had a better than expected first quarter with pricing being the main driver of its Top Line margin growth. The pricing power of its diabetes drug, Mount Jarl, supported much of the pricing gains, solidifying Eli Lilly's competitive advantage. Morning Star has raised its estimate for what Eli Lilly stock is worth to $540 from $500.

What changes in Medicare are seniors likely to experience in 2024?

Seniors on Medicare are likely to see reduced prescription costs as a result of changes included in the Inflation Reduction Act. This includes a cap on insulin costs at $35 a month, free Part D qualified vaccines, and a cap on out-of-pocket costs at about $3,300 a year. Additionally, drug companies are penalized if they increase their prices more than the rate of general inflation.

What is the significance of the spending caps for seniors on Medicare?

The spending caps mean that seniors who are taking expensive drugs will not have to pay out of pocket costs exceeding a certain limit. This is particularly beneficial for those who were previously paying thousands of dollars more after reaching a certain spending threshold. The cap is set at $3,300 a year, which will further reduce to $2,000 next year.

What is the current situation with interest rates and how is it impacting the stock market?

Interest rates are likely to stay 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, this has dwindled to possibly one or two cuts. This has caused the stock market to stumble as high interest rates make borrowing more expensive and can impact profits, making investors nervous.

How could fewer interest rate cuts benefit investors?

Fewer interest rate cuts could benefit investors by allowing the market to reset and valuations to come back down to healthier levels. This could provide a buying opportunity for investors with cash on the sidelines in both stock and bond markets.

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 good for the income part of fixed income. However, it could mean less price appreciation for bond holdings. In an environment where stocks are doing well, bonds can act as a portfolio diversifier, which could be beneficial if stocks fall.

What is the key takeaway for investors regarding market volatility?

The key takeaway is that short-term market volatility is a normal part of investing and should not derail a long-term strategy. It's important for investors to construct their portfolios in a way that they can withstand volatility at a level they are comfortable with. For those with cash on the sidelines, a short-term pullback could be a buying opportunity.

What are the eligibility criteria for the federal program called 'Extra Help' for low-income seniors?

The 'Extra Help' program is for people with low income and assets. The qualification tests are based on an individual's income and savings. If these are low enough, the program can cover all premiums and other out-of-pocket costs.

How can short-term market volatility present long-term opportunities for investors?

Short-term market volatility can create opportunities for investors by presenting buying opportunities at lower prices. It also allows the market to reset and valuations to normalize, which can be beneficial for long-term investors looking to enter or add to their positions.

Outlines

00:00

📈 Stock Market Insights and Predictions for 2024

The video begins by discussing the outlook for Apple's stock in 2024, with Morning Star's optimism despite a weak start to the year. It covers Apple's Q1 revenue, the impact of iPhone revenue, and expectations for growth in 2025, including the potential for generative AI to boost sales. The segment also touches on Amazon's stock value, its strong operating profit, and the contribution of AI to its growth. Additionally, it discusses Eli Lily's performance, the importance of its diabetes drug, and the factors influencing its sales and margins. Lastly, the video addresses changes in Medicare in 2024 that could save money for subscribers.

05:01

💊 Medicare Changes and Prescription Costs in 2024

This paragraph delves into the changes brought by the Inflation Reduction Act, focusing on the Medicare Part D program and its impact on seniors facing high drug costs. It outlines specific changes such as the cap on insulin costs, free Part D qualified vaccines, and a cap on out-of-pocket costs. The segment also discusses penalties for drug companies that increase prices beyond the rate of general inflation and expanded financial assistance for low-income seniors. Furthermore, it highlights new drug price negotiations and predicts a decrease in the out-of-pocket cap to $2,000 in the following year, along with an option for spreading costs over the year to ease financial burdens.

10:02

📉 Interest Rates and Their Impact on the Economy

The third paragraph discusses the Federal Reserve's approach to interest rates amidst inflation. It explains that the market initially expected several rate cuts in 2024, but due to persistently high inflation, this expectation has diminished. The implications for the stock market are explored, noting the negative impact of high interest rates on stock performance. The segment also suggests that short-term volatility could present a long-term opportunity for investors and emphasizes the importance of a long-term strategy over short-term market fluctuations. It concludes with a brief mention of the bond market, suggesting that higher interest rates could lead to higher yields for bond investors.

15:04

🎬 Investing Insights Wrap-Up and Acknowledgments

The final paragraph serves as a wrap-up for the Investing Insights episode. It encourages viewers to subscribe to Morning Star's YouTube channel for more content on investment ideas, market trends, and analyst insights. The video ends with acknowledgments to the production team, including the senior video producer, lead technical producer, associate multimedia editor, and editor.

Keywords

Volatility

Volatility refers to the rate and extent at which the price of a financial asset, such as a stock, can change rapidly and unpredictably. In the context of the video, it is discussed as a short-term market phenomenon that could present opportunities for long-term investors, as it may lead to temporary price dips that can be capitalized on for potential gains.

Long-Term Investing Opportunities

Long-term investing opportunities are investment prospects that are expected to yield returns over an extended period, often years. The video suggests that periods of market volatility can create such opportunities, as they may lead to undervalued assets that can appreciate in value over time.

Apple Stock

Apple stock represents shares in Apple Inc., a multinational technology company. The video discusses Morning Star's outlook for Apple's stock performance, noting challenges such as increased competition and slowing refresh cycles, but also potential for growth through improvements in iPhone revenue and generative AI product announcements.

Federal Reserve

The Federal Reserve, often referred to as the Fed, is the central banking system of the United States. It plays a crucial role in setting monetary policy, including interest rates. The video mentions the Fed's delay in interest rate cuts, which is impacting investor expectations and market behavior.

Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The video discusses how high inflation is causing the Federal Reserve to delay interest rate cuts, which in turn affects market volatility and investment strategies.

Morning Star Inc

Morning Star Inc is a financial services firm known for its investment research and analysis. In the video, Morning Star's market reporter, Sarah Hansen, investigates how short-term volatility can be a long-term opportunity for investors, and the company provides insights into various stocks, including Apple and Amazon.

Amazon's Stock

Amazon's stock refers to the shares of Amazon.com, Inc., an e-commerce and technology giant. The video highlights Morning Star's evaluation of Amazon's stock, noting strong revenue growth from its online stores, advertising, and Amazon Web Services, and the potential benefits from generative AI adoption.

Eli Lilly

Eli Lilly and Company is a pharmaceutical company. The video discusses Eli Lilly's better-than-expected first quarter, driven by the pricing power of its diabetes drug, and its competitive advantage in the market. The company's stock value is also evaluated by Morning Star.

Medicare

Medicare is a federal health insurance program in the United States that primarily serves individuals aged 65 or older. The video mentions changes in Medicare, particularly the Inflation Reduction Act, which has led to reduced prescription costs for seniors and other improvements in the Medicare Part D program.

Interest Rates

Interest rates are the percentage at which interest is charged or paid by commercial banks for first-class loans. The video discusses how the expectation of interest rate cuts has diminished due to persistent inflation, leading to market volatility and affecting investor strategies.

Portfolio Diversification

Portfolio diversification is a risk management strategy that involves spreading investments across various financial instruments, industries, and other categories to optimize returns and reduce risk. The video suggests that in a well-diversified portfolio, bonds can act as a stabilizer during stock market downturns.

Highlights

Morning Star is optimistic about Apple's prospects for 2025 despite a weak start in 2024.

Apple's March quarter revenue was just over $99 billion, aligning with Morning Star's forecast.

iPhone revenue, which declined this quarter, is expected to improve by next year.

Morning Star anticipates increased domestic competition in China and slowing iPhone refresh cycles globally for Apple.

Apple Services have shown strong revenue growth, but a lack of updates on generative AI has impacted their share performance.

Morning Star expects Apple to announce generative AI products over the summer, which may drive improved revenue 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, and Morning Star sees potential for further growth.

Amazon's growth is attributed to its online stores, advertising, and Amazon Web Services.

Morning Star believes Amazon could gain tens of billions of dollars from generative AI adoption.

Eli Lilly's first-quarter performance exceeded expectations, with pricing being the main driver of 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 increased its estimate for Eli Lilly stock's worth to $540 from $500.

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 per year, with further reductions expected next year.

Drug companies face penalties if they increase prices more than the rate of general inflation.

Eligibility for financial assistance for low-income seniors has expanded, with more help available for premiums and costs.

Interest rates are likely to remain higher for longer as inflation continues to run hot.

Short-term market volatility could present long-term opportunities for investors, according to Morning Star's Sarah Hansen.

Analysts suggest that a market reset could allow valuations to return to healthier levels.

For fixed income investors, higher interest rates generally mean higher yields, but less price appreciation for bond holdings.

Bonds can act as a portfolio diversifier in an environment where stocks are doing well.

Investors with cash on the sidelines may find short-term market pullbacks as buying opportunities in both stock and bond markets.