October Scare: Market Under Pressure Again After Apple’s Quarterly iPhone Sales Disappoint

Key Takeaways:

  • Red tone prevails as investors react to FAANG earnings, Apple’s AAPL iPhone miss
  • Week on pace to be the worst since March, with volatility at four-month highs
  • More profit-taking possible as traders might be shy carrying long positions into weekend

Maybe it’s the Halloween effect, because investors saw FAANG earnings yesterday evening and got spooked.

Futures took a scary ride downward overnight, including a 500-point screeching plunge for futures on the Dow Jones Industrial Average ($DJI) at one point. Those clawed back quite a ways ahead of the open, but a generally red tone still prevails and selling picked up again as the open neared. This continues a rough week where the S&P 500 Index (SPX) is already down 4.5% and stocks are on track for their worst weekly performance since March.

A few days ago, most of the blame centered on virus caseloads and lack of a stimulus agreement. Profit-taking ahead of the election also seemed to play a big role in the downturn. None of those factors have left the building.

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Today, though, attention turns more toward the FAANG stocks, especially Apple (AAPL), which got punished overnight after missing iPhone projections. Tech is supposed to be the market’s “savior” and there was a lot of build-up about how good things would be. Perhaps too much, because the FAANG earnings apparently didn’t beat those investor expectations by enough and now AAPL and Facebook (FB) are lower.

It wouldn’t be surprising to see pressure continue with, some participants potentially hesitant to carry long positions into the weekend before the election. Remember if you’re trading to keep a close eye on futures this coming Sunday night. Volatility is already at four-month highs, and things could get even choppier as voting day approaches.

Also, remember that the $DJI isn’t the entire market. It’s only 30 stocks, and it’s likely to get weighed on by AAPL today (though the impact likely won’t be as severe as it would have been if AAPL hadn’t split earlier this year). The SPX is a better gauge of actual market performance.

Either way, we’re on pace for a “red October,” unless the market has a major recovery at some point today. That would make October the second consecutive declining month for the SPX.

There seems to be a lot of risk aversion heading into the weekend, and the Cboe Volatility Index (VIX) is back above 38. It stayed below 30 for a long time and then just rocketed up. We’ll see if it hits 40 again today, which is another milestone number that it was above earlier this week. Crude oil and the VIX just crossed each other and not in a way that’s good for the market. Crude recently traded near $36 a barrel, the low end of its recent range.

FAANG Earnings Rundown

If most of Thursday was about building in premium ahead of FAANG earnings, then the period immediately after the close raised questions about that strategy.

Earnings from the four reporting FAANGs looked good from a bottom and top-line standpoint, with no major misses. However, it appears that for all but one of the companies, Alphabet (GOOGL), the pre-earnings exuberance got carried away a bit.

That’s because it came down not to the top and bottom lines as much as to the stuff under the surface. With Facebook (FB), investors honed in on higher than expected spending levels in Q3. With Apple (AAPL), there was disappointment that iPhone sales missed Street expectations (though there may have been a very good reason for that, as we’ll see). It’s hard to find anything really unlikable about Amazon’s AMZN (AMZN) results, but that stock could be suffering a little profit-taking.

We’re not going to lay out all the numbers here, because earnings were 18 hours ago and you probably know what each company reported. What’s more important is figuring out what the results could mean going forward and why shares reacted the way they did in the post-market.

Let’s start with AAPL, the biggest name in the group if you go by market-cap. The company beat on earnings and revenue—with revenue impressively rising about 1% from a year ago despite the pandemic—but came up about $1 billion short on iPhone sales vs. analyst estimates. Sector expert Angelo Zino, senior industry analyst at CFRA, identified a key reason possibly behind that.

“iPhones disappointed, but we’re not too concerned because people might have just been holding off (to buy) the new lineup, which was delayed several weeks,” Zino told TD Ameritrade Network* yesterday. “Also, iPads and Macs absolutely destroyed expectations, offsetting the iPhone weakness.” Services revenue growth, he said, matched expectations.

China Sales Weak for AAPL, but 5G Could Help Ahead

Zino was a bit more concerned about what he saw as a weaker than expected quarter for AAPL in China, but said that might also reflect people waiting for 5G-capable iPhones. “Consumers care a lot more about 5G in China than in the U.S.,” Zino said.

The iPhone softness as people waited for the new product might actually end up being a tailwind for AAPL going into its December and March quarters. That’s because some of the people who’d previously waited to replace their phones might start doing that in the current quarter. So instead of pulling forward demand, as many Tech companies did early in the pandemic, AAPL kind of “pushed back” demand.

Once again, AAPL offered no guidance. This could be another reason the stock is down 4% in pre-market trading. It’s the third quarter in a row AAPL hasn’t given an official forward look.

As for the strong Mac sales, that’s great, but many investors don’t see computers as the “future.” It doesn’t get them fired up the way the Mac did, say, in 1984.

Generally, what happened at AAPL after it reported might have reflected what we warned about in yesterday’s report. Apparently there were whisper numbers circulating in the market about the chance for even better results. In that sense, AAPL’s beats on top- and bottom-lines just weren’t enough to please the ravenous market that always wants an extra cookie. Sometimes you’re a victim of your own success, and expectations were so high going in.

The same could be true at AMZN, which reported record revenue and profit but saw shares edge lower after the close. One concern going in was heavy spending to improve the supply chain during Covid-19 and on Amazon Web Services (AWS), its cloud platform. While spending levels remain high, it’s hard to get too worried when profit tripled year over year.

Holidays Started Early for Amazon

Sales at AMZN surged, too, as online shopping continued to soar thanks to the stay-at-home economy. It’s also good to hear that holiday shoppers are getting an early start. “We’re seeing more customers than ever shopping early for their holiday gifts, which is just one of the signs that this is going to be an unprecedented holiday season,” AMZN CEO Jeff Bezos said in a statement.

One concerning thing in AMZN’s report was the company saying its holiday shopping capacity is going to be tight, probably meaning supply chain and getting stuff to customers. That’s not what people necessarily want to hear.

An amazing stat, though, is that AMZN has already had its most profitable year and that’s before the holiday season even began. Also, keep in mind that Prime Day got pushed back into Q4 this year, so revenue and profit from that isn’t factored in yet, either. AMZN was the only game in town when all the smaller stores shut down earlier this year.

Rounding out the FAANGs: Alphabet and Facebook

GOOGL shares were the only real gainer after the close, and the story is a simple one. Advertising revenue was strong, and that was the biggest thing for them going in.

FB shares traded both sides of unchanged after reporting, maybe because its earnings offered something for everyone. They beat on earnings. However, user growth slowed. However, advertising revenue was higher year over year.

At FB, the two main things people watch are user growth and advertising, and they were kind of split. The fact is, they’ve shown such great user growth that it’s allowed them to get more ads. But now, user growth is slowing, so what does that mean down the road? Those are questions FB investors could be pondering now.

Some of the pressure on the four FAANGs after the close might have been profit taking. AMZN, for instance, was up 73% year-to-date going into earnings (see FAANG chart below). Valuation concerns have started to dog some of these stocks. AAPL, for instance, has spent most of the year way above its traditional price-to-earnings ratio, and the previous quarter’s blow-out earnings might have helped puff up the stock to a higher valuation than some investors were comfortable with.

Beyond the FAANGS (You Mean There’s More?)

One interesting thing is how the market came barreling back Thursday in part on news of House Speaker Pelosi reaching out to Treasury Secretary Mnuchin with questions about the stimulus. It’s hard to believe anything happens soon, but maybe after the election. Which puts even more focus on the voting outcome going into next week.

Energy came into the spotlight this morning with results from Exxon Mobil XOM (XOM) and Chevron CVX (CVX), which both fell in pre-market trading despite lighter than expected quarterly losses. Cost cutting appeared to help the bottom line for both, which isn’t a bad thing. But it’s hard to get too excited when demand for their products remains so weak.

One more thing: Twitter (TWTR) got trounced after the close yesterday, probably in big part because its monetizable daily active user (DAU) growth came in below expectations last quarter. Revenue looked pretty healthy, but DAU is the company’s most important figure, so when that comes in light the stock often gets punished.

Not So Great Expectations? Next week features a heavy data calendar, with construction spending, October auto sales, factory orders, and—last but probably first in investors’ hearts—next Friday’s October payrolls report. We’ll provide some insight next week into how payrolls might shape up. First, though, there’s one more data item before this week ends: University of Michigan sentiment. This one keys off a consumer sentiment report from Tuesday that looked pretty decent from a headline perspective but troubling when you dug into the numbers.

Notably, that report showed the “expectations” index falling from a month earlier, suggesting consumer optimism is on the wane after a sharp September rise. Worries about the virus spread might have factored into that low number, and the Michigan report today could provide more insight into how consumers feel going into the final two months of this unprecedented year. Observations from the report’s chief economist are often worth a look, especially if he says anything about people starting to get nervous about lack of a new fiscal stimulus even as new shutdowns loom.

Paying More to Watch: Remember earlier this week when we mentioned how subscription-based companies like Netflix NFLX (NFLX) need to further “monetize” their services and steer investor attention away from subscriber growth alone? It looks like NFLX must have heard this kind of talk, because they announced plans Thursday to hike their most popular subscription plan by $14 a month.

Investors welcomed the move and sent NFLX shares up 5% Thursday, though the news might raise concerns about subscribers fleeing to cheaper streaming competition. The final words haven’t been carved in stone yet, but it does feel like subscribers to these services tend to be “sticky” and perhaps can deal with paying more. However, we’re in a struggling economy, so there’s that to consider. It should be interesting to hear how it worked out when NFLX next reports in early 2021.

It is interesting that NFLX’s announcement came just as shutdowns began to spread in Europe and the U.S. this week. And as winter cold and darkness loom. Maybe it’s a timing thing.

Long Road to Nowhere: It’s not the end of a quarter, but today does mark the end of a three-month stretch that’s basically seen the market run around in every direction and basically end up in the same place. That’s the picture you get from the three-month S&P 500 Index (SPX) chart, which shows the SPX now in about the same place it was at the start of August. It’s had a lot of ups and downs since then, but the basic range between 3200 and 3500 has held very firmly. Each dip found buyers and each rally ran into sellers. Often when the market is range bound this way, it takes some sort of major catalyst to knock it out of its doldrums.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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