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.
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.
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.