Idea of the day: Can Apple save tech?

Apple will announce its earnings at 2130 BST this evening, and it is easily the biggest event for stock markets today, even this week. After some big earnings misses from the likes of Netflix, Facebook and Twitter, the heat is on for Apple to deliver at least the $2.18 earnings per share that the market anticipates.

As you can see in chart 1, which has been normalised to show how the biggest US tech firms move together, Apple has been in the weaker half of performers in the US tech sector since the end of 2017. However, its share price has been relatively stable in recent days, and it has not suffered the major declines that have plagued Twitter, Netflix and Facebook since last week.

Chart 1:

Source: Capital Index and Bloomberg

Apple’s earnings key to its next move

This can be viewed two ways. Firstly, the market could be waiting to make up its mind about the next direction for Apple share price depending on how tonight’s earnings figures go. If Apple fails to deliver EPS growth in line with expectations then Apple’s share price could go the same way as Twitter and Facebook’s. Conversely, we could see a big upswing if Apple manages to beat expectations. Worth noting, as we lead up to Apple’s earnings figures, its share price is grinding higher.

Growth vs. Value, let the battle begin

Secondly, regardless of Apple’s earnings data, it could be a step too far to ask Apple’s earnings to save the entire tech sector, especially since its share price has been lagging some of its peers in recent months. This suggests that fundamental issues are weighing on tech right now, such as concerns over the sustainability of the business models (Facebook, Netflix and Twitter), along with hefty valuations turning off investors who are starting to look at value-based investing strategies.

The overall tech sector has recovered this morning, and we would expect a broad-based bounce in the coming days if Apple does beat earnings expectations. However, this doesn’t alter the fact that tech may have peaked. As you can see in chart 2, which shows the sectoral break down of the S&P 500, the tech sector has led the entire S&P 500 since the Spring, however the tide may be turning. As the tech sector has come under pressure in recent weeks, consumer discretionary and industrials, two previously unloved sectors, have started to shine. This is a sign that investors could be rotating out of flashy tech and back into vanilla, stalwart stocks like GE and Walmart.

Beware sectoral rotation and the S&P 500

This sectoral rotation may not be positive for the overall S&P 500, however, as it is reliant on tech for its hefty valuation due to the relative size of some of the tech titans and the impact that their share price moves have on the overall US index. Consumer stocks and industrials may not be able to make up the shortfall if tech continues to come under pressure.

Chart 2:

Source: Capital Index and Bloomberg

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