Even in the best of times, Apple Inc. is a formidable bellwether. So when its stock plunges on concerns that reach beyond tech and into every corner of the U.S. economy, investors everywhere gasp.
The iPhone maker just capped its worst seven-day stretch in two years and sent the Nasdaq 100 Index plummeting, dragged down by speculation analysts are too optimistic about next year’s sales. While Tuesday’s bounce steadied nerves, anxiety about the future shows little sign of dissipating as Wall Street frets the high point of the earnings cycle is past.
“I think we saw peak earnings and sales growth in 2018,” said James Ragan, director of wealth management research at D.A. Davidson. While still bullish on stocks, Ragan says that “volatility is back, and we are seeing fears going into October re-emerge.”
Everyone knows S&P 500 profits are gangbusters now. Third-quarter earnings rose 26 percent in the S&P 500 and the full year’s results will almost match that. But for all the cheer about the present, companies are notably dour on the future. Guidance is deteriorating.
Over the past three months, firms saying sales will miss analyst estimates outnumbered those saying they will exceed them by the most since 2009, data compiled by Evercore ISI showed. The trend also worsened for the bottom line.
Guidance Impact
When guidance weakens, it dims many of the cases for owning equities, particularly valuation, which bulls usually frame against next year’s estimates. While the S&P 500 looks cheap at 16 times forecast profits, it would prove less so should those forecasts turn out wrong.
From a strengthening dollar to rising costs of wages and raw materials, and higher interest rates to trade tensions, the list of headwinds is building for corporate America.
“As long as the dollar is headed higher and rest-of-world growth remains weak, the outlook for revenue and earnings growth is likely to remain under pressure,” Dennis Debusschere, head of portfolio strategy at Evercore, wrote in a note to clients. Last month, he lowered his 2019 estimate for S&P 500 earnings and said if historical valuations prevail, the S&P 500 may not bottom till 2,550.
Spreading Gloom
The equity benchmark fell 2 percent to 2,726 on Monday for a third straight day of declines as Apple led the retreat in tech stocks. The drop came after Lumentum Holdings Inc. cut its second-quarter outlook after one of its largest customers asked to “meaningfully reduce shipments” for previous orders. Lumentum didn’t name the customer, but Apple is its biggest, according to Bloomberg supply-chain data.
Selling spread in Asia, with Japan’s Nikkei 225 losing more than 3 percent at one point and the MSCI Asia Pacific Index down more than 2 percent.