QQQ - The Market Has An Apple Problem

2024-01-08 13:51:21 ET

Summary

• Equities have had a tough start to 2024, with the Nasdaq falling 3.25% and the S&P 500 falling over 1.5% in the holiday-shortened trading week.
• The strong gains in 2023 and rising Treasury yields are contributing factors to the difficult start for equities in the early innings of 2024.
• Tech giant Apple Inc. also is not helping the overall sentiment on the market, as the company has seen a rash of negative analyst commentary to start 2024.
• Apple shares are down nearly 10% from their peak in mid-December, and the company is also potentially facing a large new antitrust suit in the United States.
• What weakness in Apple means for the market and its shareholders is discussed in the paragraphs below.

Vengeance is a monster of appetite, forever bloodthirsty and never filled .”? Richelle E. Goodrich.

Equities have gotten off to an inauspicious start to 2024. The Nasdaq (COMP.IND) fell three and a quarter of a percent in the holiday shortened trading week to commence the New Year. The S&P 500 (SP500) fell just over 1.5% and broke its nine-week winning streak, the longest since 2004.

There are several reasons to the tough start for stocks in 2024. First, after a better than 24% gain in the S&P 500 and just north of 43% rise in the Nasdaq in 2023, equities had a lot of " good news" already price in as began the New Year.

In addition, the 10-Year Treasury yield (US10Y) closed above the four percent threshold on Friday for the first time since mid-December as rates have started to back up after a better than 100bps point plunge in the fourth quarter. This was the primary factor behind the rip-roaring rally that 2023 closed with. Fourth quarter earnings for the S&P 500 are only supposed to rise by 1.3% on a year-over-year basis, according to the latest forecast from FactSet. This is down substantially from the eight percent growth that was being factored in last September.

That said, I expect three to four percent earnings growth when S&P 500 Q4 numbers are completely factored in. Most companies will step the lowered bar for profits, in the quarterly ritual I call the " analyst two step ." However, given the sharp slowdown in economic activity since the better than five percent GDP growth of Q3, I expect forward guidance for FY2024 from most companies' managements to be quite tepid. This is likely to be a headwind for the market in the coming weeks as fourth quarter reports hit the wires.

The market also has an " Apple" problem, as the tech giant from Cupertino has gotten off to quite rough start to 2024. The stock has seen five straight losing sessions and is now down nearly 10% from its peak in mid-December, when the stock came ever so close to hitting the $200 level. Apple ( AAPL ) has been hit with a couple of prominent analyst downgrades in the early days of 2024. First, on the first trading day of 2024, Barclays downgraded Apple to Equal Weight over concerns over its hardware business. These worries included the iPhone 15, which the analyst stated have seen uninspired sales since its launch this September. He doesn't expect the coming iPhone 16 launch in fall of this year to reverse sales trends either. The analyst at Barclays lowered his price target on AAPL to $160 and also sees less than 10% revenue growth from the company's app store and no " bounce back" in MacBook or wearable sales.

A day later, Robert W. Baird stated the shares of Apple might be overvalued given their large gains in 2023. Then on Thursday of last week, Piper Sandler downgraded Apple to Neutral from Overweight citing " concerns about iPhone inventory levels and a perceived peak in unit sales growth rates ."

In addition, according to the NY Times, NY Post and other media sources, Apple could be hit by a large antitrust action by the Department of Justice, sometime in the first half of this year. This is likely going to be the biggest antitrust suit the company has faced in the United States in years and will revolve around whether Apple " leveraged its various hardware and software products to ensure the iPhone has a dominant hold on the smartphone market ."

At the very least, this suit when it hits could be a major distraction for the company. Settlement could involve significant fines as well as changes to some parts of the company's business model as well.

It is hard to see Apple Inc. shares rebounding in the near future given the recent analyst downgrades and potentially new antitrust challenges, not to mention various challenges on the economic front (slowing global growth, exposure to China, etc.). Even after the recent decline in the stock, AAPL trades at just over 27 times forward earnings projections and seven times forward revenues. Even at Barclay's new price target of $160 a share, the equity would be trading at over 24 times forward profits. Apple is projected to see sales growth of three to four percent this year after revenues fell three percent in FY2023. The consensus analyst firm estimate sees earnings growth of just over five percent this year after flat profit growth in FY2023. It should be also noted that a good portion of this increase in EPS will be driven by stock buybacks. The shares pay just over a half percent annual dividend yield.

The challenges for Apple are just not an issue for the tech giant's shareholders. It creates yet another headwind for the overall market. AAPL has the largest market cap in the market in the market at just over $2.8 trillion, even with the recent hiccup in the stock. Microsoft ( MSFT ) is closing fast on that crown it should be noted. Apple's stock was a core part of the " Magnificent Seven" that accounted for approximately two-thirds of the gains from the S&P 500 in 2023.

The stock is widely held and liked by retail investors, to understate the level of attachment many investors have to this equity. Many view the stock's performance as a proxy for the overall market. The equity also makes up approximately seven percent of the overall S&P 500 index and nine percent of the Nasdaq. Obviously, continued weakness in Apple shares will be reflected in the performances of these two indexes. Therefore, Apple's recent travails are not only a problem for Apple shareholders but for the market overall.

Every gesture of retribution carries in it the risk of escalation. It is not an insignificant possibility that the morally right may result in the morally wrong. ”? Ágnes Heller.

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