(Reuters) – When Apple’s shares fall, is Wall Street’s entire performance at risk?
Blake
The outsize influence of Apple on both the technology sector and the entire stock market was thrown
into sharp relief when the iPad
maker’s shares fell 4.1 percent on Monday.
The alpha male of the stock market, Apple accounts for a third of the
S&P tech sector’s 20 percent year-to-date return, the best performance of any of the 10 sectors in the Standard &
Poor’s 500 index this year.
The problem is, Apple’s success may be masking a larger trend in the wider market toward
slower profit growth.
Technology companies are expected to report earnings growth of 7.5 percent for the first quarter, according to Thomson
Reuters estimates. But excluding Apple, which is due to report results next Tuesday, the technology sector is looking at an
earnings decrease of 0.3 percent, according to the data.
“It seems like every quarter, every year, everyone is
predicting technology is this great group, and recently, without Apple it would never be there,” said Daniel Morgan, who
helps manage about $3.5 billion at Synovus Trust Company in Atlanta. Synovus Trust’s assets include about 30,000 Apple
shares.
Big tech companies that have already reported this quarter have done little to inspire Wall Street. Google
reported in-line revenue last week, while International Business Machines and Intel Corp results reported late Tuesday failed
to ignite buying. All three stocks ended lower on Wednesday.
Still to come are results from Microsoft, due Thursday,
and Texas Instruments, expected on Monday.
In addition to earnings, another key performance measure are company profit
margins, an indication of how much control a company has over its costs. Profit margins are higher for tech companies than
for any other sector in the S&P 500 sectors, but much of that advantage is a result of Apple.
For the first
quarter, the net profit margin for the tech sector is estimated at 17 percent. That falls to 15.7 percent when Apple is
excluded, Thomson Reuters data showed, enough to push technology into the second spot, after the financial
sector.
It’s a similar story for revenue
Tech sector revenue growth is estimated at 6.7 percent. Without
Apple? It’s just 2.3 percent, Thomson Reuters data showed.
Apple’s stock accounts for 4.5 percent of the S&P 500
index, a weighting not seen by any company since 1999, when Microsoft Corp had a 4.9 percent weighting. Apple is the largest
holding for many money managers, to say nothing of the billions of dollars in index funds of which Apple is a core
holding.
Apple’s massive market capitalization, which stands at $566 billion after hitting $600 billion earlier this
month, means that the company’s impact on the market has been “enormous,” S&P analyst Howard Silverblatt
said.
Apple stock is up about 50 percent for the year so far, helping the S&P 500 to a rise of about 10 percent.
Among stocks in the S&P, its performance is ranked sixth so far this year, and most of those that have out-performed
Apple, such as Netflix, are rebounding from big losses in 2011. Not Apple.
“If you were not in Apple in the first
quarter, you were hurting. Options on it are extremely expensive,” Silverblatt said.
Year-over-year profit growth for
S&P 500 companies slowed from 18 percent in the third quarter of last year to 9.2 percent in the fourth quarter. It is
estimated at 4.4 percent in the first quarter, Thomson Reuters data showed.
Apple’s earnings growth has been on the
opposite path. Earnings per share jumped 52 percent in the third quarter from the year-ago period and 116 percent in the
fourth quarter. First-quarter EPS is seen up 54 percent, based on the Thomson Reuters consensus estimate.
Within the
exchange-traded funds market, Apple accounts for about 18 percent of Powershares QQQ Trust.
Given this prominence, an
earnings disappointment from Apple would hit far more than the stock itself.
If Apple were to see margins squeezed,
even slightly, it would have an outsized influence on tech sector margins, earnings and by extension, broader S&P 500
performance, Dan Greenhaus, chief global strategist at BTIG LLC in New York, wrote in a recent report.
That’s part of
what frightened investors as the stock tumbled nearly 9 percent in a five-session run of losses that ended Tuesday.
Of
course, Apple, with its long record of beating market expectations, is not in the business of disappointing
people.
Thomson Reuters StarMine shows a predicted surprise of 3.9 percent for Apple’s upcoming results. A number
above 2 percent suggests a strong likelihood the company will beat estimates.
That compares with a 1 percent surprise
for the whole S&P 500 tech sector, according to StarMine. Among other individual companies, Microsoft has a predicted
surprise of negative 0.2 percent for earnings.
The pullback in Apple shares has underscored the fact that other tech
companies simply do not have the same kind of heft.
Some fund managers and individual investors are assessing the
risks of owning too much Apple.
“‘No tree grows to the sky’ is the adage,” said Joseph Doyle, co-fund manager at
Morris Capital Advisors LLC in Malvern, Pennsylvania. The firm has trimmed its Apple position twice to take profits, though
Apple remains among its top holdings.
Technically, the stock could be headed for more losses, which could drive the
S&P 500 lower. The stock broke below its five-day and 20-day moving averages of $623.77 and $613.19, respectively, last
Friday, and remains below those levels.
“We expect Apple to act as a drag on the major composites due to its outsized
impact on S&P 500 earnings and price movements,” said Gareth Feighery, president of options education firm
MarketTamer.com in Philadelphia.
Some managers noted more tech companies are paying dividends these days to attract
more investors.
“A lot of the old core, mature-growth tech companies like Intel, Microsoft, Cisco and Qualcomm are
paying dividends, and that’s opening them up for the possibility of new funds that could go into them,” Morgan
said.
Apple, too, in March said it would pay a dividend, declaring its first dividend in 17 years.
It’s hard
to deny that Apple presents a conundrum. It’s too valuable not to own – creating a risk should its stratospheric rise
eventually falter.
“Apple has kind of led us to this point,” Morgan said. “The question is, Do some of these other
names start picking up the slack if Apple is not doing quite as well?”
(Additional reporting by Doris Frankel in Chicago;
Editing by Eddie Evans and
Leslie Adler)