The Issue with Apple

This morning, investors are parsing through yesterday’s earnings report from Apple.

And the company absolutely destroyed Wall Street earnings expectations. The company reported earnings per share of $1.30. Analysts had anticipated just $1.01 per share.

Apple sales increased by 36% from its June-ending quarter compared to the same period in 2020. It reported $81.41 billion in revenue, well above the consensus forecast of $73.3 billion.

Its iPhone sales alone increased by almost 50%. It sold $39.57 billion in new phones during the quarter, crushing analysts’ projections of $34.01 billion.

And every one of the company’s product lines has experienced a sales increase of at least 12% year-over-year.

After this report, I believe there will be two types of people.

Those who own Apple stock…

And those who eventually will own Apple.

Even if you think you don’t own Apple, you might find that you really do.

Regardless, Apple is now the single-most important stock in the U.S. markets.

Don’t believe me?

Wait until you see just how influential this stock is on the U.S. markets.

So Goes the U.S. Stock Market

In 1953, Charles Wilson, then CEO of General Motors, appeared before Congress. During those hearings, he famously said: “As goes GM, so goes the nation.”

Fast forward nearly 70 years, and GM is largely an afterthought in the U.S. economy. It’s largely been replaced by Silicon Valley tech giants with incredible reach and influence.

No one is larger than Apple.

In fact, it’s fair to say today that “As goes Apple, so goes the U.S. stock market.”

Apple is the largest public company in the United States, with a market capitalization of $2.44 trillion.

To put that figure into perspective, let’s just look at a world map.

Apple’s market capitalization is larger than the GDP of all but seven nations. Its market cap is bigger than the individual economies of Italy, Canada, South Korea, and Russia.

I joke that when economic leaders host the next G20 conference, they should invite CEO Tim Cook.

But that figure is just the start.

The Heart of our Stock Market

I often repeat that the Dow Jones, S&P 500, and Nasdaq are not the U.S. stock market. They are indexes that attempt to measure various levels of performance at certain stock exchanges.

The Dow Jones Industrial Average measures the daily price movements of 30 very large U.S. companies that list on the Nasdaq exchange and the New York Stock Exchange.

The S&P 500 measures the value of shares from the 500 largest companies by market capitalization that trade on the Nasdaq or New York Stock Exchange.

Meanwhile, the Nasdaq 100 Index – known by the ticker QQQ – represents the top 100 non-financial companies trading on the NASDAQ exchange.

It turns out that Apple is part of all three indexes. And the company has a significant weight on the value of each one.

On the S&P 500, Apple represents 6.24% of the weight of the index. (Microsoft, which is No. 2 in weight, comes in at 5.81%.)

On the Nasdaq 100, Apple is nearly 11.4% of the index weight. (Microsoft is second at 9.99%.)

And on the Dow Jones, it represents 3.1% of the index. Apple is actually 18th on the Dow list, well behind UnitedHealth Group (No. 1 at 7.74%.)

So, it’s pretty clear that just one stock has a remarkable impact on the direction of the three largest indexes, the broader market, and investor sentiment.

But it gets even deeper than this.

Passive Investments Are Heavy On Apple Stock

Now, some people might not own Apple directly. They might not have 10 or 200 shares sitting in their portfolios.

But if you own a retirement account or you work with a broker or you have any exposure to exchange-traded funds (ETFs), there’s a high probability that you own Apple stock.

Retirement funds, pension plans, and even brokers like using passive investments such as ETFs because they expose you to a broader index, industry, or sector. In the case of Apple, there are 244 ETFs that have Apple as a Top 15 holding in their portfolios.

The Technology Select Sector SPDR Fund (XLK) is a technology equities ETF that generates significant interest from institutions and retail investors alike. Apple represents 22.25% of the total weight on that ETF.

The Fidelity MSCI Information Technology Index ETF, which is popular in the brokerage’s retirement accounts, lists Apple as 20.3% of its weight.

Now those are technology funds, so Apple should be a big holding.

But large-cap ETFs like the iShares Global 100 ETF (IOO) and luxury ETFs like the Emles Luxury Goods ETF (LUXE) also have a large amount of exposure to Apple stock –12.54% and  7.49% respectively.

Is This Normal?

It’s fair to ask if it is safe for so many ETFs, indexes, and other funds and portfolios to have such substantial exposure to one single company.

But this is the nature of the market. It certainly is quite dangerous given that Apple has such a large market cap and significant global reach.

From a behavioral standpoint, everyone is all-in on Apple. Which is why it’s important to remain vigilant about the company’s stock and to ensure that you have protective stops in place.

Apple is an amazing company. But we have seen pullbacks and struggles at certain times in the past. For now, the stock remains in the Green Zone with a positive momentum uptrend.

The current Health Indicator trailing stop for AAPL will trigger at $108.53.

Be sure to keep an eye on the price and be ready to act should that stop be triggered. We’ll talk more about other companies reporting earnings all this week and next week.