Apple's profit report is the market's next big test now. JPMorgan breaks down whether it can deliver

Published Wed, May 3 20233:06 PM EDTUpdated Wed, May 3 20234:51 PM EDT

With the Federal Reserve's rate decision now in the rearview mirror, the next major test for markets will come from Apple 's March quarter earnings, scheduled for release postmarket Thursday. So far this year, investors have flocked to the tech sector as bond yields fall , and the recent bank crisis spurred a flight to safety in companies offering rock-solid balance sheets and cash flows. Stocks in tech behemoths such as Apple have been resilient in 2023 despite concerns of an economic downturn. Meta Platforms shares have doubled, while Alphabet and Microsoft are up about 20% and 28%, respectively, as investors bet on AI . Apple shares are up almost 31% this year. Apple on Thursday is expected to post its second consecutive down quarter, with some analysts anticipating forward guidance to show yet another year-over-year decline in the June quarter. The largest tech companies so far this earnings season appear to be faring better than feared, despite expectations for broad earnings declines compared with a year ago. Now, investors are anxiously waiting to see if the iPhone maker will follow in those companies' footsteps. "The question of whether Apple can follow the other Big Tech companies, which have outperformed on their recent prints, and raise the likelihood of a more favorable year for Big Tech over the rest of the market, is tricky as while there exist many similarities in relation to broad drivers, there are at the same time different fundamental drivers in play," JPMorgan analyst Samik Chatterjee said in a Wednesday note to clients. Some of those "dissimilarities" include stabilizing growth rates "more evident for other Big Tech companies versus Apple's set up for revenue and earning declines," he said. Apple shares are also trading toward the higher part of its recent range. Apple's differences Investors have flocked to Apple given its large, integral user base that's able to limit any potential downside, Chatterjee said. Investors have also come to view greater resources and heightened flexibility in larger companies as an advantage over some smaller names, he added. "In relation to growth trends, Apple has tracked directionally very similar to the rest of Big Tech on average, and investor sentiment is now turning positive with expectations building for a stabilization in growth trend or finding the bottom in relation to a lower growth level that Big Tech can rebound from in a cyclical recovery," the analyst said. However, "fundamental drivers" for Apple and its stock differ from most of its Big Tech rivals, Chatterjee noted. Of the major technology companies, Apple is the only one bracing for a revenue decline and one of only two preparing for earnings to fall. While many companies, including most notably Meta Platforms, have focused attention on aggressively cutting costs , Apple's more fine-tuned cost management probably means fewer opportunities to heed similar cost disciplines. "In FY23, even if Apple were to hold expenses flat at the low-end of the guide, operating expenses will still be up high-single digit percentages, which will drive operating margin pullbacks in FY23," Chatterjee said. For years, investors have closely monitored Apple's installed base, which now sits at a record level after hitting two billion users last quarter. Chatterjee expects further gains in Apple's installed base to stem from non-iPhone devices. Apple's valuation looks inexpensive when anticipating "depressed earnings power," fueled by a consumer recession. However, the company still trades within a tight range of its recent historical multiples, compared with most other technology companies trading at a slight discount. Meanwhile, Apple's stock outperformance since the Covid-19 pandemic looks "materially higher" than peers, having more than doubled since January 2020, Chatterjee added. "The eventual outcome might be simply driven by F3Q (C2Q) guidance, where investors might be looking for assurance and visibility into limited downside despite a tough macro, even if it comes down to assuring that revenue declines do not deteriorate further than the -5% moderation that investors are already expecting," Chatterjee wrote. Apple reports fiscal second-quarter results Thursday covering the calendar first quarter, as Apple's fiscal year ends on Sept. 30. — CNBC's Michael Bloom contributed reporting.