Even Apple wasn’t strong enough to escape the economic headwinds that are bruising corporate profits and unhinging the stock market.
Apple fell sharply in after-hours trading Tuesday after a big earnings and revenue miss. Although some of its shortfall was related to its pending iPhone 5 release, its report is likely to be a drag on the market Wednesday and take other tech stocks with it.
“Obviously, it’s big for the Nasdaq. It’s 20 percent of the index. Overall, it’s an important indicator with respect to the economy and sentiment in general,” said Dan Greenhaus, chief global strategist at BTIG.
Apple follows many other major companies with lower- than-expected revenues, the result of a slowing Europe and world economy, stronger dollar and more reluctant consumer. Dozens of companies report before the opening bell Wednesday, and many of them may signal the same problems. Caterpillar, Boeing, PepsiCo and Ford are among those companies reporting in the morning, and Visa, Whole Foods, Zynga and Akamai report after the closing bell.
The disappointing report from Wall Street’s favorite stock also comes as Europe’s sovereign crisis has once more been hammering global markets, and U.S. economic data continues to disappoint. The Richmond Fed manufacturing survey, for instance, fell Tuesday to its lowest level since April, 2009, with a large drop in shipments and orders.
But Apple is a favorite and it is viewed as unique among multinationals, and other consumer and tech companies. A beat by Apple and positive forecast might have helped boost the stock market.
“A big swing and a miss there,” said Jack Ablin, CIO of Harris Private Bank. “There’s two things here. This is a company that’s been routinely beating estimates and whisper numbers and everything else, and the other one is bigger than that. It’s that this is a company that’s created a brand that’s really been different, and with respect to their stock, had been different in a lot of respects, impervious to the vagaries of the global economy and the market and everything else.”
Apple earned $9.32 per share in its fiscal third quarter, up from $7.79 per share last year but more than a dollar below expectations. Apple revenues rose 23 percent to $35 billion, but $2.2 billion below forecasts. Apple also disappointed on its outlook, guiding analysts to $7.65 per share for the current quarter on revenues of $34 billion, down from an estimated $10.22 per share and revenues of $38 billion.
“It’s obviously bad news for Apple. It’s bad news for equities indices. We have to see if like other companies, this is just sort of a hiccup, or there’s something structural here --- there’s just a not a desire to replace as many iPhones. That’s sort of the question. Is this just people waiting for the iPhone 5 in the fall or is there a macro problem,” said Greenhaus. “…Now we’ve seen dozens of other companies saying there’s a macro problem.”
Apple sold 26 million iPhones in the quarter, below some forecasts, but it sold 17 million iPads, better than expected. “It’s just a disappointing iPhone number. We were looking for 29 million units. They did better on the iPad,” said Gene Munster, analyst at Piper Jaffray on “Closing Bell.” “While I got the iPhone number wrong, I think this is déjà vu to what we saw in September of last year. It’s going to be really hard to break out how much is macro related…and how much is related to an iPhone 5 slowdown.”
The Apple news could not come at a worse time for market confidence. In the past week, Europe’s debt crisis has more seized control of markets, driving stocks and commodities lower, pushing shorter duration Northern European sovereign yields into negative territory while the yields of Spanish and Italian debt skyrocket. A flight-to-quality trade into the U.S. Treasury market drove yields to record lows, as fearful investors watch for signs of contagion from a Europe that doesn’t seem to have a plan to stop the flow of bad news. The 10-year was yielding a record 1.40 Tuesday.
Markets were spooked Tuesday by reports that Greece may need more funds, and the continuing speculation that Spain may need to seek a bailout of its sovereign. The market speculation also engulfed Italy, as it is seen as the next sovereign in line that could need help.
“Since the financial crisis, this is the first time we’ve gone into an earnings seasonthat’s going to be worse. We’re not sure how to react to that with most of southern Europe melting into the Mediterranean,” said Art Hogan of Lazard Capital Partners.
“I think we should be as concerned as we ever have been about the European situation,” Hogan said. “I think it’s as nerve wracking as it’s ever gotten.”
Stocks fell sharply after the headlines on Greece, but stocks finished off their lows after a Wall Street Journal story that said the Fed is moving closer to some sort of stimulus and could consider action next week or at its meeting next month. While containing no new ideas, the article helped lift stocks as traders speculated the reporter got the story from top Fed officials. The Dow finished down 104 points to 12,617. The S&P 500 was off 12 at 1338, just above an area of support, and the Nasdaq fell 27 to 2862.
“It’s certainly going to offset the Fed,” said Ablin of the Apple news. “They’ve got their party hats and their pom poms on, and I think the Apple announcement is going to take the air out of their balloon.”
Miller Tabak strategist Peter Boockvar said investors should beware of market expectations about the Fed, which he says have been supporting stock prices. “At the end of the day, if earnings are going to drive where stocks go, and earnings growth is slowing dramatically, it’s irrespective of what the Fed is going to try to do to keep asset prices higher,” he said on “Closing Bell.”
Greenhaus said he remains cautious on stocks and expects a difficult summer. “Given the level of uncertainty with earnings, and the concern about Greece — they need another bailout. And you have Moody’s putting a couple of triple A countries on negative watch, we’re not enthusiastic about investing. I think you’re in a dangerous moment here for investors,” said Greenhaus.
Besides earnings, Apple fallout and Europe, there is just one economic report Wednesday. New home sales are reported at 10 a.m.
“Housing is one bright spot in the economy,” said Mark Zandi, chief economist at Moody’s Economy.com. “It’s improving. It’s steadily improving in sales, construction and now in house prices. Housing’s gone from being a hurricane in the economy to a tailwind. We need all the help we can get.” As long as the job situation does not deteriorate further, Zandi said the lower rates should help boost home purchases, as rising rents are making buying more attractive.
There is also a 1 p.m. auction of 5-year notes Wednesday, and the House Financial Services Committee will hear testimony from Treasury Secretary Timothy Geithner. Geithner is appearing to discuss banking regulation but will certainly be asked about what he knew about Libor and the rigging scandal.