Market can do without another Apple crunch

Apple could sweeten the day

Apple’s universal brand and status as the world’s No. 1 company by market value make the importance of its earnings difficult to overstate, particularly when markets are nervy, like now.

Solid Apple first quarter results on Tuesday evening by themselves might not stop investor anxieties from creeping higher, but they would help. Conversely, U.S. shares are at risk of a deeper retreat if Apple’s Q1 earnings disappoint.

Apple has become an even more crucial pivot in recent quarters, as the number of U.S. mutual funds holding its shares in significant volume leapt 188% to 288, according to Morningstar.

Expectations are nuanced though. Investors are positioning for a rebound in iPhone sales this year, after they fell for the first time in 2016, but optimism on the first quarter of 2017 is mixed.

Shareholders reason a game-changing revamp could be in the works in 2017. The view is based on the opportunity offered by the device’s 10th anniversary, and the cultural significance in China of the iPhone’s next logical number, 8.

These expectations help explain why Apple shares are up 15% since November and 36% higher since last May. Institutions are also attracted by Apple stock’s relative cheapness at 13.7 times price/earnings, even after last year’s advance, vs. a richly rated S&P 500 at around 17 times.

The influx of holders makes the success of iPhone 8 even more crucial. So the subject will be a hot topic during Tuesday’s conference call, though Apple execs are likely to avoid details.

Supercycling

Instead, the group will probably attempt to push the focus on to its aggressive expansion in services like Music, Pay, App Store and iCloud. These have been pumping up recurring revenues at a rapid pace over the last 18 months, with a 24% bump on the year in Q4 alone.

There’s no sign of a slowdown yet. Apple boasted that New Year’s Day App Store sales “shattered” records, with $240m in software like Pokémon Go, Super Mario Run and Angry birds downloaded, and $3bn in December, even before looking at Music.

This gives Apple something else to point to instead of iPhones sales, which are largely forecast to remain sluggish. They still account for 60% of all sales.

At the optimistic end of Wall St., analysts see as much as 79 million iPhones sold in Q1, typically the fastest for handset sales. That would easily beat the 74.78 million sold in Q1 2016. Forecasts have been slipping over the past month however, partly in reaction to reports that Apple planned to trim production by around 10% in Q1. The lower end of consensus suggests about 75 million, with faster-growing Android device sales in key growth regions like China and India still one of the group’s biggest challenges.

Thomson Reuters forecasts point to Apple sales of $77.4bn in the quarter ending in December, potentially the first rise after three straight quarterly declines. Earnings per share (EPS) are forecast to slip about 2% to $3.22. For the full-year, bank analysts have conjured up the iPhone ‘Supercyle’ to lift pre-tax profit 4.4% after last year’s 11% decline. The term is meant to describe the potentially larger-than-normal customer base that would be ready to upgrade—if attractive features are on offer—after only marginal iPhone tweaks since iPhone 6. In Q2 EPS is seen up almost 10% on the year at $2.08, and sales are seen rising 6% to $53.9bn.

With eyes on Apple’s first quarter, second quarter and full year, whilst valuation rises and investors pile in, a lot is riding on tonight’s earnings, at Cupertino, California and on Wall St.