(Bloomberg) — The stock market narrative this week is usually dominated by the Federal Reserve meeting. However, this time, all eyes are on Apple Inc.’s upcoming earnings report on Thursday, rather than the central bank’s interest-rate decision on Wednesday.
There’s legitimate concern surrounding Apple. As the world’s most valuable company, accounting for 7.2% of the S&P 500 Index, it is facing a decline in smartphone sales, and one of its key suppliers is currently under investigation in China. This upcoming quarter is expected to mark Apple’s fourth consecutive decline in revenue, its longest decline in over two decades.
Other major tech companies have experienced drops in their stock prices after posting strong earnings this month. Therefore, investors may not be forgiving if Apple shows any signs of weakness. The stock is already struggling and is on track to have its third consecutive losing month, a situation not seen since last year’s market downturn. As a result of this recent decline, Apple has lost approximately $460 billion in market value, eroding its previous value of around $3 trillion.
“If the earnings quality deteriorates for Big Tech companies — which has been a significant factor in supporting stocks this year — then that gives the stock bulls one less branch to cling onto,” stated Ed Clissold, the chief US strategist at Ned Davis Research, in an interview.
Apple’s influence extends beyond its own stock price and can have a ripple effect on other stocks. The stock market itself is unstable, with the S&P 500 and Nasdaq 100 Index dropping approximately 10% from their peaks in July. Earnings reports from the so-called Magnificent Seven technology companies — Alphabet Inc., Amazon.com Inc., Apple, Meta Platforms Inc., Microsoft Corp., Nvidia Corp., and Tesla Inc. — have driven these declines after fueling the market surge throughout July.
Undoubtedly, the Federal Reserve’s decision is still significant news. While traders generally expect the central bank to keep interest rates unchanged, they will closely listen to Chair Jerome Powell’s remarks during the press conference that follows, in search of hints about future direction and the economic outlook.
Various other notable events are currently driving global risks. The escalation of the conflict in the Gaza strip has just begun, with Israel deploying troops and tanks in the area as part of the second, more extended phase of its fight against Hamas. There are concerns that groups supported by Iran will intensify attacks in the Middle East in response.
In the financial world, just before the Fed’s rate decision on Wednesday, the US Treasury will announce plans to sell bonds and notes to refinance the government’s maturing debt, known as refunding. An increase in sales could cause yields to surge once again, increasing pressure on growth stocks, whose present value of future profits decreases as interest rates rise.
Recently, tech earnings have played an oversized role in stock price movements, but mostly to the detriment of investors. Three out of the five largest tech companies by market capitalization that have reported their earnings so far experienced declines the day after.
Tesla’s stock dropped over 9% on October 19, following the electric-vehicle manufacturer’s failure to meet profit and sales estimates. CEO Elon Musk revised growth expectations downward due to declining demand and rising interest rates. Shares of Alphabet, the parent company of Google, fell nearly 10% on October 25, a day after the firm announced lower-than-expected profits in its cloud-services business, which management attributed to customers cutting back on spending.
However, Amazon.com and Microsoft both saw a rally following their earnings announcements, thanks to strong results in their cloud-computing businesses.
For investors, the problem lies in the fact that the largest tech companies have been responsible for the majority of the S&P 500’s gains this year, offsetting weakness in real estate, financial, and healthcare stocks. Therefore, if Big Tech continues to struggle, investors will have to identify alternative sources for gains.
It’s worth noting that, aside from Tesla, the biggest tech firms haven’t reported particularly disappointing earnings. Take Alphabet, for example. The search giant is experiencing a recovery in its dominant digital advertising business, leading to better-than-expected profits and sales. Similarly, Meta exceeded profit and revenue estimates, yet the stock still dropped following Chief Financial Officer Susan Li’s comments about economic uncertainty during the company’s earnings call.
The nervous reactions in the market suggest that after this year’s rally, stocks are priced for perfection. Consequently, even a hint of weakness is enough to trigger selling, according to Eric Beiley, the executive managing director of wealth management at Steward Partners Global Advisory.
“I’m concerned about the risk of higher-for-longer interest rates, which has capped investment in Big Tech due to fears of more significant declines in stock prices,” Beiley said. He used the recent pullback as an opportunity to buy shares of Amazon.com but is still awaiting further drops in Apple’s and Alphabet’s multiples before making a move.
Heading into earnings season, the Nasdaq 100 was trading at around 24 times projected profits, which is above the average of 21 times over the past decade. Five of the seven largest tech companies were trading above 28 times profits.
“Clients feel their losses more than they appreciate their gains,” explained Dana D’Auria, co-CIO at Envestnet Inc. “However, if concern grows in the stock market, Big Tech can still be a potential beneficiary as it is known as a risk-off, defensive play.”
(Adds Israel-Gaza fighting as a risk in the 7th paragraph.)
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