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The markets will look to quarterly earnings results after today’s close from Apple (AAPL) and Amazon.com (AMZN) for market direction. Both stocks have rallied sharply recently, which is a significant reason why the S&P 500 Stock Index ($SPX) (SPY) is up more than +17% this year. However, with both stocks trading at elevated multiples and facing headwinds to their core businesses, there will be pressure for today’s earnings results to justify their recent sharp rallies.
Interest rate-sensitive technology stocks have come under pressure this week from a surge in bond yields as the 10-year T-note yield rose to a 9-month high today. If the recent rally in technology stocks is to get back on track, Apple, with its 48% gain this year and its market cap of more than $3 trillion, will need to show impressive quarterly earnings results today as the company accounts for nearly 8% of the S&P 500 Index, giving it enormous sway over the index
Apple today is expected to report a -1.7% y/y decline in revenue in its fiscal third quarter, which would be its third consecutive year-over-year contraction in revenue. Apple also faces a risk from a weak smartphone market in China, one of its biggest markets, especially after Qualcomm's (QCOM) tepid revenue forecast Wednesday underlined weak demand for mobile devices. Huntington Private Bank said, “Apple looks expensive, and presumably everyone who wants to own it already does, so you really have to wonder what it could do to get a pop.”
With this year’s +53% rally in Amazon.com, the stock trades at about 40 times estimated earnings. Although that is below its long-term average, a key driver of the company’s profitability comes from its Amazon Web Services cloud business. In a potential warning sign for cloud services, Microsoft warned of an extended slowdown in its cloud-computing business last week. Huntington Private Bank said, “The results for Microsoft were decent, but even decent results won’t be well received with Amazon as Amazon is still the market leader in cloud, and if it also shows things slowing, then investors got ahead of themselves.”
The health of the consumer could decide the fate of today’s earnings results from Apple and Amazon.com. Bloomberg Intelligence notes that the fiscal third quarter is a seasonally weak period for Apple, with the Mac being the sole product category that may post better-than-expected results. Apple has also asked its suppliers to keep iPhone shipments flat year-over-year as it contends with waning demand for electronics, though it may still raise prices for its Pro models. Bloomberg Intelligence also said that slowing consumer and enterprise spending could offset Amazon’s strength in streaming and advertising.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
