Apple remains a dominant market force, even with all its China woes

Apple Inc. may have lost its cachet as the most valuable company in the U.S. if not the world but the iPhone maker remains a dominant market force.

The stock, once a must-own asset for most portfolios, has shed more than one-third of its value since its peak on Oct. 3 and is down more than 4% in 2019, significantly underperforming the S&P 500 SPX, +0.41%  , which is up 2.7% so far this year.

But even though some of the shine has come off Apple AAPL, +1.70% in the wake of its dramatic decline, it still holds the key to the vitality of the technology sector and broader equity market, suggesting that the tech giant may be an accurate sentiment gauge even if it has lost the crown as the publicly traded company with the loftiest valuation. That title now goes to Amazon.com Inc. AMZN, +0.17%  , valued at $800 billion, compared with Apple's market capitalization of $702 billion.

"The S&P 500 technology sector has never outperformed the S&P 500 when Apple has plummeted more than 30%," said Ohsung Kwon, an equity and quantitative strategist at Bank of America, in a recent report.

As the strategist writes, the company has experienced two other substantial selloffs since 2011, when it became the world's biggest company by market cap. During each of those episodes, tech stocks have significantly underperformed the S&P 500.

The first was between September 2012 and April 2013, when Apple stumbled 44.4% on fears that it had stopped innovating, and the second was from February 2015 to May 2016, when the stock sank 32.1% on concerns over China's economic growth. The impetus for that decline mirrors the current retreat for Apple. Last Wednesday, Chief Executive Tim Cook said the company would report much lower sales than previously expected, citing slowing iPhone sales and pressure in China.

That knocked an already-beleaguered Apple further from its perch as the first company to reach a $1 trillion valuation in August until Apple and the rest of the market staged an epic collapse in the last three months of 2018.

A review of the recent crashes indicate that when a selloff was triggered by Apple-specific issues, such as 2012, rather than the macro-driven plunge in 2015, tech stocks underperformed the S&P 500 much more significantly, according to Kwon.

The most recent drop, in his view, is due to a combination of idiosyncratic Apple woes and macroeconomic factors, and therefore, the tech sector isn't likely to underperform the S&P 500 as severely as it did in 2012 when it lagged behind by 18 percentage points.

"The smartphone market is much more mature now than it was back in 2012-2013, when it was a market with tremendous growth opportunities for not just Apple, but also for other tech companies. Therefore, slowing phone sales pose less risk to the sector today versus back then," he said.

The adverse effect of Apple's weakness on tech stocks may also be slightly more muted now since its weighting in the tech sector had fallen to 20.5% as of October from 27.3% in its heyday seven years ago.

To be sure, the opposite is also true, with tech stocks rallying after Apple bottoms, as illustrated in the chart below.


"Tech outperformed the S&P 500 by 7.2 percentage points over 12 months after Apple troughed in 2013, and by a whopping 21.9 percentage points following the 2016 trough," Kwon said. "Even if one were to exclude Apple's contribution to these rallies following its trough, tech would have outperformed by 2.1 percentage points in 2013 and 10.7 percentage points in 2016."

Worries about China aside, Kwon maintained his overweight rating on tech shares, noting that the risk-to-reward ratio is attractive going forward, especially if the U.S. can secure a favorable trade deal with China.


source: MarketWatch
image by: AFP/ Getty images