How Apple & Google Transformed into a Systemic Risk to the US Stock Market

According to Credit Suisse strategists, the “reversal of fortunes” seen by tech behemoths Apple and Google-parent Alphabet are dragging down the performance of the overall US stock market. The S&P 500 forecast has been “skewed” by companies suddenly transitioning from high growth forecasts to much more modest outlooks.

This Bad Apple Could Roil the S&P 500

An “unusually high” number of big US companies have revised previously-bullish earnings forecasts downwards. These include Alphabet and Apple, as well as Exxon Mobile, GM, Micron, Chevron, and ConocoPhillips. Oil and technology companies are also pushing US stock market growth downward.

The S&P 500, according to Refinitiv, will now only grow by 0.3% in the first quarter of 2019 compared to 23% in all four quarters of 2018. Overall S&P 500 growth for 2019 is now expected to be 4.5%.

There have only been three other times since 1990 that so many companies have seen such a reversal of growth. Per the chart above, 71 quarters have seen two or fewer top 20 growth contributors move to the worst-performing segment. Thirty-five quarters have seen less than a handful of companies reverse so rapidly, and just three have seen more than seven do so, including the first quarter of 2019.

Cited in CNBC, Patrick Palfrey, a US equities strategist at Credit Suisse, says:

“For the typical company, are they seeing a problem? The answer is not really. You can get a few bad apples distort the underlying trend.”

US Stock Market at Mercy of Mega Companies and Tax Cuts

Palfrey believes other companies on the S&P 500 are growing at between 5% and 6%, adding:

“There is this massive skew for these mega cap companies that had really great years, over the past several years and in 2019, the trends are uninspiring for them.”

Within minutes of stock market’s opening trades on Tuesday, #Apple had reclaimed the title of most valuable American company for the first time in more than two months. By around midday, #Microsoft had taken back the top spot. https://t.co/lBDb9oWJCM

— CiteShare (@CiteShare) February 5, 2019

Credit Suisse also points to the importance of Trump’s recent tax cuts in skewing stock market growth. The cuts added 7% to 8% to earnings growth in 2018 but are now acting as a headwind, dropping profit growth by 1%. Benefits included last year, like deductions for capital expenditures, are no longer available.

Breaking Down Growth Struggles at Apple and Google

Apple reported profit growth of over 40% in the third-quarter of 2018 and is now expected to see a 12.3% decline. Alphabet’s profits grew 23.9% in the third-quarter of 2018 but are likely to fall 21% in the first quarter of 2019.

S&P 500 (Blue) Apple (Red) Alphabet (Orange) Performance Over the Last Year Source: TradingView

The two have moved from being at the top of the S&P 500 for growth to the bottom 20%. They are joined by Exxon Mobil – dropping from 51% growth to a 14.5% decline – and Chevron, dropping from 148% growth to a 21% decline for the same period.

Apple’s ability to swing the US stock market has never been in doubt. Its shocking sales forecast revision in early January dropped its own share price 10% and sent the Dow Jones Industrial Average plummeting by a whopping 500 points. Apple and Microsoft are still battling to be America’s largest company by market value and are closely followed by Alphabet and Amazon.

These Silicon Valley giants helped propel the US stock market to record highs in 2018, but as the economy moves deeper into 2019, they may prove to be its greatest foil.

Featured Image from AP Photo / dapd, Martin Oeser