Investors Brace for Crucial Week as Apple Takes Center Stage from Federal Reserve

Investors are currently more interested in Apple Inc.’s upcoming earnings report on Thursday than the Federal Reserve’s interest-rate decision, which is usually the highlight of the stock market week.

There is reason to worry about Apple. The world’s most valuable company, which represents 7.2% of the S&P 500, is facing a slump in smartphone sales and one of its key suppliers is under investigation in China. Net sales are expected to decline for the fourth consecutive quarter, the longest streak in more than two decades.

Shares of other major tech companies have fallen after posting solid earnings this month, so investors may not be forgiving if Apple shows weakness. The stock is already struggling on pace for its third losing month, which hasn’t happened since the middle of last year’s selloff. The latest upheaval has wiped about $460 billion of market value from a company that was previously valued at about $3 trillion.

“If the quality of earnings from Big Tech declines — which has been a big factor in supporting stocks this year — that gives the stock market one less leg to hang on to,” Ed Clissold, chief U.S. strategist at Ned Davis Research, said. interview.

Apple is big enough on its own to affect S&P 500 returns, but it can also spill over into other stocks. Markets are weak, with the S&P 500 and Nasdaq 100 down about 10% from their July highs. Earnings reports from the so-called Magnificent Seven tech companies — Alphabet Inc., Amazon.com Inc., Apple, Meta Platforms Inc., Microsoft Corp., Nvidia Corp. and Tesla Inc. — led to declines after stocks rose. until July.

Of course, the Fed’s decision is still big news. While traders generally expect the Fed to keep interest rates steady, they will be listening closely to what Chairman Jerome Powell says in his press conference afterward for clues about the road ahead and the outlook for the economy.

Other significant events also increase global risk. The escalation of the war in the Gaza Strip is just beginning as Israel sends troops and tanks to the area in the second and longer phase of the fight against Hamas. There are fears that Iran-backed groups will increase attacks in the Middle East in response.

In the financial world, just hours before the Fed’s interest rate decision on Wednesday, the U.S. Treasury Department is announcing plans to sell bonds and notes to refinance maturing government debt, known as a bailout. Another increase in sales could send profits skyrocketing again and increase pressure on growth stocks, whose present value of future returns falls as interest rates rise.

But technology returns have played a big role in stock price movements lately, usually for the worse. Three of the five largest tech companies that have reported so far have reported earnings the next day.

Tesla shares fell more than 9% on Oct. 19, the day after the electric vehicle maker missed profit and sales estimates. CEO Elon Musk canceled growth expectations amid falling demand and rising interest rates. Shares in Google-owned Alphabet fell nearly 10% on Oct. 25, a day after the company posted a smaller-than-expected profit in its cloud services business, which management blamed on keeping customers’ budgets in check.

However, both Amazon.com and Microsoft rose as a result of their earnings, both fueled by strong results from their cloud computing businesses.

The problem for investors is that the biggest tech companies have been responsible for most of the S&P 500’s gains this year, helping to offset weakness in real estate, financials and healthcare stocks. So the bulls will have to figure out where the gains will come from if Big Tech stocks continue to sputter.

The thing is, aside from Tesla, the biggest tech companies haven’t really reported bad earnings. Take the alphabet. The search giant sees a resurgence in the digital advertising business that dominates its revenue, fueling better-than-expected profits and sales. Or Meta, which beat earnings and revenue estimates, but the stock still fell after CFO Susan Li commented on financial uncertainty during the company’s earnings call.

According to Eric Bailey, managing director of asset management at Steward Partners Global Advisory, the jittery reactions are a sign that stocks have been priced to perfection after this year’s rally, making any hint of weakness a reason to sell.

“I’m concerned about the risk of higher longer-term interest rates, which has put a cap on investing in Big Tech because of fears that a bigger fall in stocks is coming,” he said. Bailey used the latest buyback to buy shares of Amazon.com, but still expects Apple and Alphabet’s multiples to fall further.

At the start of the earnings season, the Nasdaq 100 traded at about 24 times projected earnings, above the 21 times average over the past decade. Five of the seven largest technology companies were priced above 28.

“Clients feel their losses more than they appreciate their wins,” explains Dana D’Auria, CIO of Envestnet Inc. “But if concern grows in the stock market, Big Tech can still inevitably be a beneficiary because they’re known as a de-risking, defensive play.”