Just before the last AAPL earnings call, we showed something extraordinary: all of the tech sector's growth in Q1 was in the hands of just one company, Apple.
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In other words, take Apple away, and the entire thesis for why "the tech bubble is different this time", namely companies that have rising profits, falls apart.
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Fast forward to this quarter, when AAPL just reported earnings that as its stock price indicates, were clearly not in the sweet spot of "priced to perfection" market expectations, driven by weaker than expected iPhone sales, a slowdown in China (which took place before its stock market crashed), a warning that the strong dollar is now impacting AAPL profitability as well, virtually no color on iWatch sales, and finally concerns about the company's guidance.
But the reason why the tech sector may suddenly be getting cold feet about pinning the entire second tech bubble on AAPL, and make no mistake it is a bubble...
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... is that as Factset reported [9], Apple is expected to be the largest contributor to earnings growth for the Information Technology sector for Q2 2015. The blended earnings growth rate (combines actual results for companies that have reported and estimated results for companies yet to report) for the Information Technology sector is 0.2%.
Exclude Apple, and the sector would report a year-over-year decline in earnings of 6.0%.
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Which is why the response to all those who say S&P earnings are not negative if you exclude energy, is that if you exclude tumbling energy earnings but also exclude AAPL, S&P earnings are once again negative.
Now since AAPL beat consensus EPS just barely, it meant that this is the 4th consecutive quarter that Apple has been the largest contributor to earnings growth for the Information Technology sector!
And here why both AAPL and the Nasdaq are swooning: as we reported last night, it is all about iPhone sales, and these disappointed.
What is driving Apple’s substantial contribution to earnings growth for the Information Technology sector in recent quarters? The iPhone product segment has reported revenue growth in excess of 50% in the previous two quarters, and is projected to report revenue growth of 51% in Q2 2015. However, year-over-year comparisons for iPhone sales become more challenging in Q4 2015. Unlike the first three quarters of the year, the exclusion of Apple from the Information Technology sector is not predicted to cause a substantial decline in year-over-year earnings growth for the sector in the fourth quarter.
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The WSJ adds some [12]more dramatic statistics:
Apple has a big impact on the overall market as well. Since the third quarter of 2011, Apple, for every single quarter, has comprised no less than 3% of the S&P 500's operating earnings, according to data from S&P Dow Jones Indices. It accounted for 2.87% of the index's operating earnings of $25.29 in September 2011, and has ranged higher since then. In the first quarter of 2015, it comprised 5.97% of the $25.81 operating profit. In the fourth quarter of 2014, it was 7.62% of the $26.75 profit.
Think of its this way. If all 500 of the companies in the index contributed an even amount, Apple's earnings would account for about 0.2% of the overall profit. On the contrary, Apple is by far the single biggest contributor to the index's earnings. The next largest contributor is J.P. Morgan, which is contributed about half of that, at 64 cents. For comparison sake, this is what other tech names are contributing: Microsoft Inc. (estimated): 52 cents, IBM: 42 cents, Google Inc.: 38 cents; Cisco Systems Inc. (estimated): 32 cents, Intel Corp.: 32 cents.
The S&P 500 is expected to see second-quarter profits contract by about 3.5% from a year ago, according to data from FactSet. If Apple weren't part of that, the contraction would be significantly larger. Given its market-cap weighting, its contribution to the index's overall earnings--currently estimated at $28.53--will work out to about $1.17.
If you subtracted that contribution, just to show how much Apple matters, the earnings contraction would widen out to about 6.7%.
Here is the most stunning chart showing just how reliant on AAPL not only the tech sector is but the entire S&P:
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And this is where China comes in. As we showed yesterday, while China sales rose solidly Y/Y, Q3 was the weakest quarter of fiscal 2015.
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Much of this may be due to the iPhone new release cycle, but suddenly the biggest question mark is how will the crashing Chinese stock market impact local consumer end-demand: this is something neither AAPL management, nor Wall Street analysts had factored into their EPS or iPhone sales forecasts.
As we already know, the bursting bubble, which Beijing and the PBOC are scrambling with every passing day to keep alive, has already impacted housing (see China Stock Rout "Rocks" Property Market: "Massive" Cancellations Expected [15]). How likely is it that general spending and retail sales will also be hammered?
And furthermore, the modest miss in iPhone sales happened in a quarter in which China had not yet seen the bursting of its stock bubble: the true collapse happened in just the last 4 days of June and onward in July, i.e., AAPL's last quarter. How "immodest" would it have been had the crash happened in June, or May, or April?
Which means that suddenly not only are Apple phone sales, but also all the hopes of a positive earnings growth in the Tech sector, as well as overall EPS growth for the S&P, pegged on one thing: whether the Chinese consumer will continue buying Apple products at a time when trillions in market cap, i.e., "wealth effect" was wiped out.
We don't know the answer, and neither does anyone else, but we have a very distinct feeling that the tech bubble, which is now reliant almost exclusively on AAPL to keep the "this time it's different" theme alive, is suddenly not all that excited that as its foundation it has an AAPL stock whose fate in turn is dependent on how well a centrally-planning communist party halfway around the globe can keep its own bubble growing in what everyone now admits is a quasi-nationalized "stock market."
The answer, when revealed in about three months, should result in some impressive volatility.
