Apple Inc. (AAPL, Financial) will announce its third-quarter results tomorrow and many analysts will be watching closely for signs that may foretell whether the tech sector’s ascendant rise may be slowing or whether it is slated to continue anew.
Reported results from the index-heavy tech sector have been mixed. Two members of the FANG group reported strong earnings recently, exceeding most analysts’ expectations.
Amazon (AMZN, Financial) reported a record $2.5 billion in second-quarter earnings, or $5.07 per share, on fewer sales ($52.9 billion) than analysts expected last week, sending its shares up 4%. Earlier in the week, Alphabet (GOOGL, Financial) came in with earnings per share of $11.75 on revenue of $32.7 billion, exceeding analysts' expectations and driving the company's stock to new highs.
By contrast, two other members of the FANG club logged disappointing results.
Netflix (NFLX, Financial), a consistent high-flying performer, dropped 5% on weaker-than-anticipated subscriber growth. The poor numbers notwithstanding, Netflix stock is still up 75% for the year.
Facebook (FB, Financial), however, nosedived 20% the day after it reported unanticipated lower revenue projections. The response of the market was unforgiving to the longtime darling of Wall Street. Facebook’s staggering $119 billion daily loss represented the single largest market cap decline in history.
It’s now Apple’s turn at bat and many investors will be watching the results closely, trying to divine what effect its reported earnings will have on the tech sector in particular and the overall FANG stock-dependent market in general.
The bloodletting in Facebook last week heighted investors’ anxieties. After its meteoric rise during the decade-long bull market, its plunge sent shockwaves through the investment community as the unpleasant reality dawned that none of the constituent components of the FANG group is immune from unanticipated and sudden changes in fortune.
Apple may be in the position of casting the final vote in terms of market perceptions about the continued vibrancy of the tech sector and whether it can continue to lead the market or whether the tech stocks, after a long time in the sun, will return back to earth.
Should Apple disappoint, even minimally, the cumulative effect from its lower-than-anticipated results, in conjunction with the calamitous evisceration of Facebook’s market value, may trigger another tech selloff as cautious investors may interpret the results as a signal the halcyon days of the untrammeled rise in the tech stocks are over.
Since knowing exactly when to exit the tech sector is fraught with risk, some investors may re-examine the tech-heavy weighting of their portfolios and reallocate some funds to the consumer staples and energy sectors, particularly since some of the stocks in that group have dropped in price.
Even though some analysts believe Apple's third-quarter numbers take a back seat to the main event, which is the increase in fiscal 2019 sales of iPhones, this view understates the effect investor psychology plays in the market, particularly in light of the unexpected poor earnings projections for Facebook. Thus, it is important to note that, on occasion, given peculiar circumstances, sometimes for many investors, perception trumps reality.
The consensus estimates, based on a survey of 11 security analysts conducted by Zacks Investment Research, are for Apple to report earnings per share of $2.19. For the same period last year, the company earned $1.67 per share.
After a nearly 10-year unprecedented and uninterrupted rise, many investors may feel it’s time to heed the old adage that if something is too good to be true, it probably is. This raises another important question that many now view as auspicious, how long can the tech stocks continue to carry the overall market?
Disclosure: I have no positions in any of the securities referenced in this article.
