Apple's quarterly report could turn the tide for the stock after its near 10 percent decline

  • There's a lot riding on Apple earnings Tuesday, including the potential for it to jump-start the tech sector — and possibly the market — if it issues a strong report with good guidance.
  • Apple stock is the largest by market cap, at $838.5 billion, and its decline has been felt. It was off 1.5 percent in April, but it has declined 9.9 percent from its March high, amid worries that iPhone sales will be soft.
  • Apple's earnings also come at a time when the tech sector's leadership is in doubt because of its recent soggy performance. The S&P tech sector was flat for April, while the S&P 500 was up 0.3 percent.

There's a lot riding on Apple earnings Tuesday, including the potential for it to jump-start the tech sector — and possibly the market — if it issues a strong report with good guidance.

Apple stock traded up more than 1.8 percent Monday to $165.26 per share, ahead of its Tuesday afternoon earnings and amid chatter that it could announce a big stock buyback.

Apple stock is the largest by market cap, at $838.5 billion, and its decline has been felt. It was off 1.5 percent in April, but it has declined 9.9 percent from its March high, amid worries that iPhone sales will be soft.

Some big-cap tech companies already have reported earnings, and stocks have had lackluster performances. The hottest group in the market, FAANG, has had a choppy ride, due to regulatory concerns and fears that profits could be peaking.

However, FAANG members Facebook, Amazon and Netflix all gained solidly in April after good earnings. Google parent Alphabet was down 1.8 percent for the month.

"[Apple] still enjoys the biggest weighting in both the S&P 500 and NASDAQ 100 and therefore wields tremendous influence over the broader price action," writes Jeremy Klein, chief market strategist at FBN Securities.

"Shares of the tech giant have lagged the usual suspects of high fliers and sit at the same level from last summer. If [Apple CEO] Tim Cook can appease analysts by speaking effusively when delivering his profit and sales forecasts, then any lingering volatility should start to subside," he added.

Apple's earnings also come at a time when tech's leadership is in doubt because of its recent soggy performance. The S&P tech sector was flat for April, while the S&P 500 was up 0.3 percent.

"It's a big-cap stock. There's a lot of focus on these FANG stocks, and Apple has a ton of suppliers that rely on it. Smartphones are a huge market for [semiconductors] overall," said Peter Boockvar, chief market analyst at Bleakley Financial Group.

"In years past, Apple was its own asset class and what happened to Apple was specific to Apple. I just think nowadays the market is less forgiving if an important stock falters," he said.

When Apple declined, it took others with it. The S&P semiconductor and chip equipment subsector was down 4.4 percent in April, though it is up 30 percent over the past year. VanEck Vectors Semiconductor ETF was down 6.8 percent in April, its worst month in nearly three years.

Apple is expected to earn $2.68 per share for its fiscal second quarter, up from $2.10 a year ago, according to Thomson Reuters. Revenue is expected to come in at $60.9 billion, up 15 percent from a year ago.

Just based on earnings, the tech sector should be heading higher, said Keith Parker, chief U.S. equities strategist at UBS. "I would say the net mix for tech has been very positive for earnings and upgrades and outlooks, and the magnitudes of beats we're seeing."

"We have a few more reports," he said. "As we move out of this earnings season, the outlook for the sector looks very strong."

Parker had been expecting tech to lag temporarily but not the type of selling it has seen recently. An earnings beat or miss by Apple would be significant.

"I think it is a factor, and it helps set the tone for the sector," he said. "The weighting in the index is very large. You've had the stock pull back a bit and underperform. It's a very large stock with a big weight."

J.P. Morgan global strategists said the stock market could suffer if the tech sector "stalls out."

In a note Monday, they said U.S. tech has become expensive and technology earnings have "massively outgrown earnings for the broader market in this cycle." As a result, "it will be progressively more challenging for the tech sector to deliver significant EPS [earnings per share] growth rates, given the substantial EPS base currently, as well as the mounting regulatory uncertainty," they wrote.

Boockvar said the problem for the market is that another leading sector has not materialized. "I cannot tell you what group is going to carry that mantle. Tech is so important. It's the biggest group in the S&P, and it's so dominant in so many ETFs," said Boockvar.

Ryan Detrick, senior market strategist at LPL Financial, said tech "doesn't have to lead. It just can't lag by a wide margin."

"If it's truly lagging, that's going to hold things back," he said. "We think the overall bull market can continue as long as tech can pull its own weight."

Tech in general and Apple in particular have strong cash positions and that makes them appealing.

"We've been positive on tech. There is near-term risk given the regulatory headwinds to some of these stocks," said Jill Carey Hall, Bank of America Merrill Lynch equity strategist. "Fundamentally, the sector still looks good. It's one sector that has more cash than debt. Tech is one of the biggest beneficiaries of repatriation, so we could see elevated share buybacks."

Apple is one of those with a mountain of cash, and analysts say it could expand its buyback program by $100 billion or more.

Bernstein analyst Toni Sacconaghi sees neutral to slightly negative risk-reward going into Apple earnings, which will be released after the closing bell. Apple's "expected large capital return program could mitigate the impact, but we believe the investor narrative post-earnings will likely be dominated by whether iPhone can grow over time. Moreover, we see Apple's current valuation as relatively in line with historical averages," he wrote.

Sacconaghi also said there's a bear case to be made should sales of a new iPhone SE product, expected in the third fiscal quarter, not be enough to offset the iPhone X/8 cycle. "Moreover, the history of the 6S cycle suggests that the stock may have further room to fall if consensus numbers decline following earnings," he wrote.

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