Overhyped profit apocalypses
The two-day boom in the stock market was stopped yesterday by reports that Apple may slow recruiting, but why should this come as a surprise to anyone?
Reports that Apple may reduce recruiting put a stop to the two-day boom in the stock market yesterday, but this should not come as a surprise to anyone because it has been expected for some time.
Apple's revenue from the United States accounts for less than one third of the company's total revenue. The remainder comes from contributions made by other countries. According to FactSet, around one-eighteenth of it originates in China, while approximately one-quarter of it originates in Europe.
Who among us would be surprised if revenue from Europe and China slowed down, especially following the covid lockdowns in China? Who among us would be surprised?
Should the predictions that the industry experts have made for Apple's revenue and profit be lowered?
They had already adjusted their projections for the iPhone manufacturer's third quarter (the time period that would end in June) in April, reducing them down from $1.25 to $1.15, but since then, they have not changed at all. In spite of the decrease, many who follow the market forecast a sizable nine percent growth in full-year revenues over 2022. The current consensus estimate for the fourth quarter (which will be finished in September) is set at $1.31, and this number has not altered since it was established in April.
One of the most straightforward explanations for why there haven't been any significant reductions in the second-half numbers is the fact that an extremely bullish narrative is beginning to emerge around the year 2023 for Apple and the majority of the technology sector in general.
Wedbush analyst Dan Ives said the following to clients in a note that he sent out the night before: "The Street is well aware of weakness this quarter and we believe ultimately is looking past June numbers to the September and December quarters with all eyes on the iPhone 14 production/demand cycle for the Fall staying on track." According to Ives, "The Street is well aware of weakness this quarter and we feel ultimately that they are looking past the June statistics to the September and December quarters."
According to Ives, "Apple is continuing to focus on a healthy product pipeline and services ramp into 2023." This includes what we expect will be the debut of an AR/VR headset that is being eagerly anticipated by a large number of people.
In a similar vein, predictions of future earnings for the S&P 500 index as a whole have been quite consistent. In spite of concerns regarding inflation, an aggressive Federal Reserve, and the Russian invasion of Ukraine, analysts anticipate that earnings for the S&P 500 will increase by 10 percent this year. This is in spite of the fact that inflation is expected to rise, the Federal Reserve is expected to be aggressive, and the Russian invasion of Ukraine. The accuracy of this prognosis is on line with that which was estimated three months ago.
Analysts have been expecting that the general market will see catastrophic levels of earnings for the past two months, but this has not yet come to pass.
We are currently in the midst of earnings season, and despite the fact that several financial institutions and a few industrial companies (such as Fastenal) have issued warnings, the market is not plunging to new lows.
For the following three reasons, bulls believe that the cautious results commentary will not have a substantial influence on the narrative:
1) The macroeconomic data has been or will be improving: the data does not support a recession, inflation is likely peaking, and the majority of the Fed rate hikes have been front-loaded, leading many investors to believe the Fed will now be cutting rates in 2023. The data does not support a recession because the data does not support a recession, inflation is likely peaking, and the majority of the Fed rate hikes have been front-loaded. The data does not support a recession because the data does not support a recession, inflation is likely reaching its peak, and the majority of the Fed's rate hikes have been front-loaded. In addition, the data does not support a recession because inflation is likely reaching its peak.
2) The performance of energy companies is responsible for a significant chunk of the growth in earnings for the S&P 500. Despite this, estimates for numerous other areas (consumer discretionary, banking) have already reduced significantly. In the previous three to five months, many Cathie Wood darlings, including Spotify, Roku, Twilio, Shopify, and Zoom, have witnessed major cutbacks in their earnings predictions.
3) Prices in many markets already reflect decreased expectations for future earnings; the majority of speculative technology names have fallen by at least fifty percent from their highs, but the majority of large banks and significant industrial businesses reached new lows around two weeks ago.
As Dan Ives argues for Apple, the primary concern in this upbeat scenario is fully directed on putting us in a better position for the year 2023.
However, there is still a significant amount of time left till the fourth quarter and 2023. Along the road, the prevalent thought has been that there is still a possibility of a retest of the lows coming in the months of August and September. This view has gained traction as the journey has progressed.
The path is littered with a huge number of potential landmines, one of which is the strength of the United States dollar, which is emerging as an additional headwind for multinational firms. There are also a great number of other potential landmines.
On their respective earnings calls, IBM and Johnson & Johnson both brought up the potentially negative effects that a stronger currency could have on their businesses.