US Stocks Fall after Apple Closes 2%

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U.S. stocks set for another big fall after Apple’s warning

LONDON—Apple’s shock warning that its Chinese sales are weakening ratcheted up concerns about the world’s second largest economy and weighed heavily on global stock markets as well as the dollar on Thursday.

In a letter to shareholders on Wednesday, Apple CEO Tim Cook said iPhone demand was waning in China and would hurt revenue for the October-December quarter. In the letter, which was released after the markets closed, Cook said Apple expects revenue of $84 billion (U.S.) for the quarter, almost a tenth lower than the consensus expectation in financial markets.

Apple’s warning, its first since 2002, deepened concerns about the Chinese economy, which had been showing signs of stress amid a trade war with the United States.

Shares in the company fell 7.6 per cent to $146 in after-hours trading and U.S. stock markets were poised for further big falls at the open. Dow futures and the broader S&P 500 futures were down 1.4 per cent.

Europe suffered similar declines, with Germany’s DAX down 1.3 per cent at 10,451 and France’s CAC 40 declining 1.2 per cent to 4,636. Britain’s FTSE 100 was 0.4 per cent lower at 6,709.

Apple’s slowdown in China ripples through global financial markets

Global markets shuddered Thursday after Apple said China is buying fewer iPhones, amplifying fears that the world’s second-biggest economy is fading.

Apple chief executive Tim Cook pointed to the unforeseen “magnitude of the economic deterioration” in China, the world’s largest smartphone market.

Apple shares sank 10 percent, and the Dow Jones industrial average dropped 660 points, or 2.8 percent, to close at 22,686.

The Standard & Poor’s 500-stock index slumped 2.5 percent, and the technology-heavy Nasdaq composite fell 3 percent. The Nasdaq dipped into bear territory, which is at least 20 percent below its most recent peak.

Stocks steered lower after a disappointing manufacturing report from the Institute for Supply Management — with the largest one-month drop since 2008.

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Nine of 11 S&P 500 sectors were in the red, with technology leading the way down. Real estate and utilities hung on to positive territory.

Apple was the biggest drag on the Dow — 29 of 30 components were down. Microsoft, Intel and Cisco were all hit hard on their exposure to China. Boeing, Caterpillar and United Technology were down. Only Verizon ended in positive territory.

Asian and European markets were reeling from the Apple announcement, down across the board. The German Dax and the benchmark index in France both traded more than 1.5 percent lower.

Kevin Hassett, chairman of the White House Council of Economic Advisers, said there is more pain in store until the United States and China resolve their trade differences.

“It’s not going to be just Apple,” Hassett said in an interview on CNN. “There are a heck of a lot of U.S. companies that have sales in China that are going to be watching their earnings being downgraded next year until we get a deal with China.”

China’s weakening economy gives President Trump the upper hand in trade negotiations and “puts a lot of pressure on China to make a deal,” Hassett said.

“If we have a successful negotiation with China, then Apple’s sales and everybody else’s sales will recover,” he said.

Gold hit a six-month high, signaling that investors were heading to safe havens in anticipation of difficult times ahead. Oil prices were rallying on indications that Saudi Arabia is making good on production cuts promised last month.

The 10-year treasury yield has fallen to 2.55 percent, down from 3.24 percent less than two months ago, another sign that investors are piling into safe assets.

“This is certainly a confirmation of a slowdown in global growth,” said Sam Stovall, chief investment strategist for CFRA. “But it does not answer the question whether it will lead to a global recession.”

Investors said Apple’s disappointing news puts more pressure on corporate earnings, which begin reporting this month.

“While all eyes are focused on Apple and the implications for growth, we should probably get a more valid check in the next couple weeks when earnings season gets underway,” said Wayne Wicker, chief investment officer at Vantagepoint Investment Advisers.

The U.S. economy remains strong, with unemployment at a nearly 50-year low. Interest rates are low by historical standards, even after nine Federal Reserve interest rate increases since December 2020.

Retailers reported a robust holiday season, and corporate earnings are expected to be healthy when companies begin reporting this month.

Corporate earnings are forecast to be 14 percent above the corresponding period in the previous year when the reporting season begins later this month.

Apple’s warning comes on the heels of two key reports in recent days from China, indicating its manufacturing sector is slowing. Investors said the slowing Chinese economy puts even more pressure on China and President Trump to seal a deal with China and end the tariffs on Chinese goods before the downturn infects the United States.

“The [manufacturing] data puts a lot of pressure on the Chinese to make a deal with President Trump on trade,” said Ed Yardeni, president of Yardeni Research.

China is much more dependent on the U.S. market to buy its goods. Exports from the United States to China represent only 7.8 percent of total U.S. exports, Yardeni said.

Yardeni said the Chinese economy is suffering from insufficient domestic demand, which makes its $500 billion in exports to the United States critical to China’s economic health.

“The Chinese can’t really afford to have any weakness in their exports, given the weakness in their domestic economy and demand,” Yardeni said. “People are living longer and not having enough kids to support them with domestic growth. China is rapidly emerging as the world’s largest nursing home.”

Some worry that the U.S. president may take the wrong route.

“I think President Trump is going to say, ‘Now I’ve got them where I want them,’” Stovall said. “I worry that he will not give them an opportunity to save face.”

The news from Apple unleashed a shock wave. Just a few months ago, the tech giant was the first U.S. company to cross $1 trillion in market capitalization. It peaked in August at $1.1 trillion. As tech stocks suffered a brutal turn toward the end of last year, Apple has fallen out of the top three most valuable U.S. companies.

It was surpassed in the last quarter of 2020 by Microsoft as the most valuable company, with a market capitalization of $780 billion.

Yardeni expects brighter days ahead.

“My hunch is that the biggest problem for Apple is that everyone has a smartphone. The market is saturated,” he said. “That will all change once 5G replaces 4G, stimulating a huge upgrade wave starting later this year into 2020.”

Some money managers said investors and computers are reacting to every wisp of news as the 10-year bull market reaches old age.

“Suddenly, investors are interpreting every detail as a ‘sign’ we are on the verge of recession in a sustained bear market,” said Nancy Tengler, chief investment strategist at Butcher Joseph Asset Management. “I don’t see the evidence. Yes, the economy is slowing — thanks to the trade situation with China. Yes, the market has gotten skittish, thanks to the Fed and the machines. For long-term investors, this is an opportunity to buy high-quality companies at a discount.”

Gerry Shih in Beijing and Damian Paletta in Washington contributed to this report.

4 Reasons Apple Stock Is Likely to Fall After Earnings

The headwinds facing AAPL stock will come back into focus after AAPL reports its Q2 results

Apple (NASDAQ: AAPL ) stock has rallied over the past month on irrational exuberance about the company’s upcoming streaming offering. The exuberance is irrational because, as I explained in a previous column, there are many reasons why Apple’s streaming offering is very unlikely to ever move the needle for Apple stock.

But even if I’m wrong, and the streaming product turns out be the savior of Apple stock, in all likelihood, it won’t be a major catalyst for AAPL stock right after AAPL reports its second-quarter results on Apr 30. That’s because the streaming product is not supposed to actually launch until this fall,

As a result, in the immediate aftermath of the company’s results, investors will probably focus on the likely year-over-year decline of its overall revenue and the continued anemic growth of demand for new iPhones.

Meanwhile, even some of the most outspoken bulls on Apple stock have indicated that AAPL stock has probably peaked for the time being. Furthermore, Warren Buffett, whose Berkshire Hathaway (NYSE: BRK.A , BRK.B ) company owned nearly 250 million shares of Apple stock as of February, recently sounded very bearish on the outlook for the company’s streaming product.

So the main, positive catalyst that’s been boosting Apple stock shouldn’t be a factor in the wake of its Q2 results.With that catalyst on the back burner, most investors will probably focus on the company’s multiple problems and negative indicators. Here’s a list of four of those negative catalysts.

Apple’s Overall Revenue Will Probably Decline Year-Over-Year

AAPL has predicted that its Q2 revenue would be $55 billion to $59 billion. During the same period a year earlier, its top line came in at $61.1 billion. Although Apple’s guidance is known for being conservative, analysts’ consensus estimate for the company’s Q2 top line is $57.4 billion. Since analysts are very experienced with Apple’s guidance habits, the company’s top line probably dropped YoY in Q2. Such a decline would likely further undermine investors’ confidence in AAPL, putting pressure on AAPL stock.

There Are Multiple Signs That iPhone Revenue Growth Continues to Be Anemic, at Best

After AAPL reported that its iPhone revenue had tumbled 15% year-over-year in Q1, AAPL meaningfully cut the devices’ prices in both China and India. The significant price cuts indicate that iPhone sales haven’t exactly made a huge comeback in those countries. The same is probably true for other developing countries.

Meanwhile, multiple analysts have issued negative assessments of AAPL in general and iPhone sales in particular.

Last month, Longbow analyst Shawn Harrison warned that iPhone trends were moving “from bad to worse,” Fortune reported. The situation in China was particularly negative, the publication quoted the website as saying. Reiterating his “neutral” rating on Apple stock, Harrison added, “Without iPhone demand acceleration on the horizon, we currently do not see any catalysts near term to drive significant EPS upside.”

Furthermore, Forbes columnist Ewan Spence in late February noted that UBS had lowered its estimates of sales of AAPL’s most expensive iPhones by 3 million units. UBS raised its estimates of iPhone unit sales for the current quarter by 2 million.

But Spence pointed out that such a performance would lower Apple’s average selling price while potentially making the most popular Apple devices technologically inferior to their Android counterparts. JPMorgan, meanwhile, after speaking with Apple suppliers, expects iPhone revenue to decline for the current quarter.

Taking a much more upbeat view of Apple stock last month and this month was Morgan Stanley’s Katy Huberty — who is always upbeat on AAPL stock. In March, she wrote that demand for the iPhone in China was stabilizing, and in April the analyst stated that the growth of the number of iPhones in use in China had reached a 15-month high. Still, as I’ll show in the next section, even Huberty appears to think that Apple stock may soon run out of steam.

Even Apple Stock Bulls Are Getting Cautious

For all her optimism about AAPL, Huberty’s price target on Apr. 12 was $220, less than 10% above the current price of AAPL stock. And InvestorPlace’s Tezcan Gecgil recently wrote:

“Although I firmly believe that Apple stock will perform well in the long-term , on a short-term basis, it may be a good idea to take profits in Apple stock before the company’s earnings call on Apr. 30. …. Q2 numbers are likely to affect investors’ sentiment towards Apple stock and drive the share price for several weeks.”

Additionally, when asked about AAPL’s streaming project, Buffett recently was less than enthusiastic. “I’d love to see them succeed, but that’s a company that can afford a mistake or two,” Buffett told CNBC.

When even Apple’s biggest cheerleaders (and the owner of huge amounts of AAPL stock) express caution about AAPL, it’s probably a good idea for all investors to sell their AAPL stock for the time being.

iTunes App Store Workarounds Could Start to Sting Apple Stock

In a column published last November, I noted, citing TechCrunch, that “Netflix (NASDAQ: NFLX ) has reportedly been testing a new system that will prevent its new customers in 33 countries outside the U.S. from using iTunes to pay for their subscriptions,.” If NFLX ever decided to implement that system, and other major app developers followed suit, AAPL stock could be meaningfully impacted, I showed.

Well, NFLX has taken that step for new subscribers, and The Financial Times has followed suit, while Spotify (NYSE: SPOT ) had previously taken the step back in 2020. In all likelihood, many large and medium-sized apps have taken the plunge or will do so soon.

The Bottom Line on Apple Stock

The strong headwinds facing Apple stock are likely to come into much greater focus in the wake of the company’s Q2 results, pushing AAPL stock much lower. Meanwhile, even bulls have become cautious about Apple stock at its current, elevated level. Therefore, investors should take profits in AAPL stock ahead of its Q2 results.

As of this writing, Larry Ramer did not own shares of any of the companies mentioned.

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