Taking Apple Out of the Equation

 | Mar 19, 2012 | 9:30 AM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:




It's time to add my two cents worth (or should I say $585 worth?) to the observations of Apple's (AAPL) effect on the stock market. I track changes in earnings estimates, for both individual stocks and the market as a whole, because market performance usually tracks changes in estimates.

Before starting on Apple, however, I want to share this chart, which is one more piece of evidence supporting my thesis. In this case, Citigroup (C) tracked the performance of the MCSI World Index against changes in the earnings estimate for that global index. What works in the U.S. also works around the world. As the estimates were revised upward, the index rallied. As they were cut, the index declined. The correlation is uncanny, but should not be surprising. Market returns are driven by expectations as much as actual earnings, and estimate revisions are a great proxy for changing expectations.

Global Revision Trends
Source: J.P. Morgan, Citigroup, Bloomberg

 Now, regarding Apple, I have noted that changes in the earnings estimate for the S&P 500 are good indicators for index performance. A week ago, I noted that operating earnings had flattened out, even as the market continued to rally strongly, and giving me indigestion. Today, I am taking a different cut.


I wanted to find the effect Apple has on the change in earnings estimates for the index, so I calculated a separate measure. I took all the constituent members of the index and tracked the contribution to the full earnings of the S&P 500 to see how it changes when measured "bottoms up" rather than "top down." The data are confusing because when measuring full earnings (not operating) and bottoms up, the S&P 500 earnings were revised up strongly the last two months. In particular, as of January, the 2012 earnings for the full index were expected to be $8.34 billion; as of today, the earnings are expected to be $8.56 billion. That definitely corresponds with the current bull market.

But wait! Apple comprises more than 4% of the index, and its earnings performance is nothing short of spectacular. Apple's earnings make up 16% of the S&P 500's earnings, so the moves in Apple can have an outsized effect on the index. (The earnings proportion is higher than the weighting because other companies can have losses.) As of January, analysts expected Apple to earn $32.6 billion in 2012. Now they expect $40.2 billion -- a 23% upward adjustment in three months!

What happens if we look at the S&P 499, removing Apple from all calculations? The situation changes materially. As of January, the estimated 2012 earnings were $7.27 billion; as of today, the estimated earnings are $7.17 billion, a decline of 1.4%. Without Apple, the earnings outlook for the S&P 500 gets weaker on the margin, not stronger.

The chart below compares the two trends.

S&P 500 2012 Earnings Trend ex-Apple
Source: FactSet

Since Apple is still a constituent of the S&P 500, the index can still rally if Apple continues to produce robust earnings performance. But a bit of caution is warranted since we need the economy ex-Apple to perform well if the rally is to have legs. Seems we can't live without Apple.

Columnist Conversations

we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...
View Chart »  View in New Window » View Chart » 



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.