Traders Face a Pivotal Week as Apple Steals the Fed Spotlight

This time around, the stock market's primary focus isn't the usual Federal Reserve meeting but Apple Inc.'s upcoming earnings report on Thursday. There's cause for concern regarding Apple, which is not only the world's most valuable company but also constitutes 7.2% of the S&P 500 Index. It's facing a decline in smartphone sales, and one of its major suppliers is under investigation in China. Apple is expected to report a revenue decline for a fourth consecutive quarter, marking its longest such streak in over two decades.

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Several other major tech companies have seen their shares drop after delivering strong earnings this month. Given this trend, investors might not be forgiving if Apple shows any signs of weakness. The company's stock is already struggling, heading for a third consecutive losing month, which hasn't happened since the middle of last year's market downturn. This recent decline has wiped out approximately $460 billion in market value from a company that was previously valued at around $3 trillion.

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Ed Clissold, the Chief US Strategist at Ned Davis Research, points out that if the earnings quality deteriorates for large tech companies, which have been a significant support for the stock market this year, it could leave stock bulls with fewer reasons to remain optimistic.

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While Apple is substantial enough to directly influence S&P 500 returns, its performance can also have a broader impact on other stocks. The market has been shaky, with the S&P 500 and Nasdaq 100 Index shedding around 10% from their peaks in July. Earnings reports from the so-called "Magnificent Seven" tech companies, including Alphabet Inc., Amazon.com Inc., Apple, Meta Platforms Inc., Microsoft Corp., Nvidia Corp., and Tesla Inc., have driven these declines after initially powering the stock market surge through July.

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The Federal Reserve's decision is still significant news, with most traders anticipating that the central bank will keep interest rates steady. They will pay close attention to Chair Jerome Powell's statements in the post-meeting press conference, hoping for insights into the economic outlook and the path forward.

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There are other major events on the horizon as well, including the announcement of the US Treasury's plans for selling bonds and notes to refinance maturing government debt, known as refunding, just before the Fed's decision. An increase in bond sales could lead to higher yields and renewed pressure on growth stocks, as the present value of future profits in these stocks decreases when interest rates rise.

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Tech earnings have played a significant role in recent stock price movements, often to the detriment of the market. Three out of the five largest tech-related companies reporting so far experienced share price declines the day after their results were released.

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In this context, the issue for investors is that the biggest tech companies have contributed significantly to the S&P 500's gains this year, offsetting weaknesses in real estate, financial, and healthcare stocks. As a result, bullish investors are left wondering where future gains will come from if major tech stocks continue to underperform.

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However, it's worth noting that, aside from Tesla, most of the major tech companies haven't reported weak earnings. For example, Alphabet has seen a recovery in its dominant digital advertising business, resulting in better-than-expected profits and sales. Similarly, Meta beat profit and revenue estimates, even though its stock fell after the CFO expressed concerns about economic uncertainty during the earnings call.

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The market's jittery reactions suggest that, after a year of significant gains, stocks are priced for perfection. Any hint of weakness is seen as a reason to sell, according to Eric Beiley, the Executive Managing Director of Wealth Management at Steward Partners Global Advisory. While the fear of higher and more prolonged interest rates has constrained investment in big tech, there's still a belief that these companies can serve as defensive plays in times of market concern.

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Dana D'Auria, co-CIO at Envestnet Inc., emphasizes that clients tend to feel their losses more than they appreciate their gains. Nevertheless, if worry mounts in the stock market, big tech companies can still be seen as beneficiaries, as they are regarded as risk-off, defensive investments.

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