There’s no denying Apple Inc. (NASDAQ:AAPL) has been one of this year’s hottest stocks. In fact, Apple’s 30%-plus returns in 2017 make it one of the top 20 performers in the S&P 500. And while the companies ahead of AAPL stock are all fine companies, all of them were in the right place at the right time, catching a fortuitous headwind. It’s unlikely they’ll sustain their current bullish paces.
Regardless, while Apple stock is a trade any stock-picker can appreciate, investors of all ilks — stock jockeys, indexers, value hunters, etc. — absolutely have to recognize that Apple wields a surprisingly large amount of influence on the broad market’s overall results. Ditto for the S&P 500’s overall earnings.
Some might even the overall impact of AAPL stock on the market’s health is a little scary.
Apple’s Impact on Market Performance
As of the latest look, Apple remains the world’s biggest company as measured by market cap. With Apple stock priced near $152, Apple is an $800 billion behemoth. The next-nearest name is Alphabet Inc (NASDAQ:GOOGL), but at “only” $655 billion, it clearly has some work to do before catching up with the world’s most recognizable consumer-technology company.
For perspective (and take the number with a grain of salt since it can change quite a bit from day to day), the entire combined market cap for the S&P 500 is on the order of $20 trillion thanks to the rally following the election of President Donald Trump.
If you can’t do the math in your head, here it is:
Apple makes up about 4% of the cap-weighted S&P 500 index, even though it’s only 0.2% of the total companies in the index. Alphabet accounts for 3.3% of the S&P 500. That’s a lot of influence from one — or even two — companies. Thing is, that influence may be underestimated unless you do the math.
The math is a bit complicated, by the way. It’s a comparison of two moving targets, akin to shooting a moving airplane from another moving airplane. It’s hard. Fortunately, Standard & Poor’s analyst Howard Silverblatt crunched the numbers and concluded that as of early April, the recent rally from AAPL stock accounted for 11% of the S&P 500’s 2017 progress. Without Apple, the S&P 500 would have been up less than 5% at the time, versus the roughly 6% gain it had made with Apple on board.
The numbers have changed since then, but only to add to the impact AAPL had made overall. The S&P 500 is now up 5.7% for the year so far, while Apple’s gain has grown from 24% then to 31% now.
Without Apple, it’s conceivable the broad market wouldn’t have made any measurable gain over the course of the past month and a half.
Apple’s Influence on S&P 500 Earnings
As much of an impact as Apple stock has on the S&P 500’s performance, it makes an even bigger impact on its bottom line. Though the first-quarter numbers are still being sorted out, for the fourth quarter, Apple’s profits made up 6.6% of the $27.90 per share the index earned.
That was actually a down quarter. Competition from other smartphone makers heats up and Apple puts more attention on lower-margin goods and services. In the fourth calendar quarter of 2015, Apple’s net income made up 9% of the S&P 500’s bottom line.
To their credit, a big chunk of the reason Apple’s impact on marketwide earnings slumped a bit in the fourth quarter of last year isn’t just because Apple’s business model and cost structure is changing. Other companies — particularly oil companies — are more profitable now than they were one and two years ago.
All the same, the rest of the pack still has miles to go before their contribution to the market’s overall profitability is commensurate with their size.
Bottom Line on AAPL Stock
It’s clearly a two-edged sword. There’s a certain level of discomfort knowing so much of the market’s fortune is linked to just one name. While that name is a decided (and profitable) powerhouse right now, nothing lasts forever.
On the other hand, with the vast majority of the names in the S&P 500 not growing nearly as much as Apple and Alphabet are, investors know they can’t complain too much about the dangerous imbalance.
Just keep an eye on AAPL stock, even if you’re a fan of index-based instruments. Not only can weakness from Apple turn into a drag on the S&P 500, but Apple itself is something of a high-profile proxy for the overall market.
If Apple starts to slump, traders will likely take that as a cue to sell other names as well, even if they’re still growing.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
