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Apple reports earnings after the close of markets at 4PM EDT today. This will be a closely watched report. Here are some things to look for.
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Must own stock: Yesterday, I saw a note from the FT which indicated that "without Apple the earnings of S&P 500 companies would show zero growth as companies have mostly beat low expectations." That’s huge. It tells you that market leadership in the US market is very narrow and that Apple’s continued earnings performance will have a big psychological impact on how the market proceeds going forward. More than that, the momentum in Apple gets back to Jeremy Grantham’s comments in the post I wrote "Grantham: Missing a bull market is a dismissible offense". Apple’s rise in the market is a result of portfolio managers’ being forced to buy Apple in order to beat their index benchmarks. Apple has performed much better than other stocks and this has buoyed shares. But shares have risen a lot more because of Apple’s huge size forcing nearly every closet indexing manager to buy Apple in order to not underperform. The higher Apple went, the more closet indexers had to buy. This is also true in reverse. If Apple’s shares fall, you do not want to own it as indexer. You will have to sell so as to beat your benchmark. This makes Apple more volatile.
I think that last point about Apple becoming more volatile because of portfolio managers managing to a benchmark is important. In the past, I had noted that I would expect Apple, as a market darling, to have to miss a few times before its shares got whacked substantially. I am now of a different opinion. I believe Apple has become of overriding importance in the narrow US market leadership. If it beats its numbers substantially, it will have a lot of momentum to take it to unheard of levels. On the other hand, a miss will cause a massive selloff. This all means a beat in the range between the Whisper number and the official estimates is the one that will produce the least volatile outcome.
Let’s see what we get at 4PM.