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Bellwether stocks signal gloom for the US
Apple's declining earnings spell trouble for the wider US economy.
"As goes tech, so goes the S&P 500." This US market maxim has cropped up regularly over the past few days as the major technology names have reported profits. The tech sector is the biggest contributor to the index's overall earnings, with heavyweight Apple the second-biggest stock. Before its slide last week, it was the S&P's (and the world's) top company by market capitalisation.
Apple has often given the sector's earnings a hefty fillip (see chart). This year, its shaky performance is expected to turn the industry's annual earnings growth negative in the first quarter (-4%). Without Apple, earnings would be marginally positive. S&P 500 earnings as a whole are set to decline slightly in the first quarter.
Tech is also an economic bellwether, "sensitive to both corporate and consumer demand", says Kathleen Brooks of Forex.com. And while the picture is obscured slightly by company-specific problems, the bad news is that the results we've seen point to a "sluggish recovery", she reckons.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
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Microsoft reported flat sales of its Windows program, "which is concerning" as it has just launched Windows 8. Google reported that its profit margins are starting to tighten. IBM has had trouble closing big software and hardware deals, notes The Wall Street Journal. Intel's report is a reminder of how weak the demand for personal computers has become as people increasingly use handheld devices to surf the internet.
The lacklustre economic backdrop hinted at by the tech reports is backed up by recent data. In the ten biggest economies, the ratio of positive to negative data surprises compared to forecasts has fallen steeply of late. China's GDP growth for the first quarter underwhelmed and Europe remains in recession. The US also seems to be stuttering again now, as the latest poor payroll growth figure earlier this month suggested.
No wonder stocks have been so jittery in recent days, says Albert Edwards of Socit Gnrale. Investors have woken up to what the commodities markets have been worried about for ages the global slowdown. Stocks seem unlikely to fall too far if growth does slow, as central banks would be likely to throw yet more printed money at them. But this looks a good time to take some profits in the more overvalued markets.
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