Shares of technology giant Apple Inc. (AAPL), which had become the first U.S.-based public company with a market cap of more than $1 trillion, closed trading on Jan. 8, 2019 down by 35.4% from the all-time high set in October. As illustrated by the table below, Apple exerts a major influence on the performance of leading capitalization-weighted market indexes, index funds, and index-linked ETFs. Moreover, the S&P Information Technology Sector Index has never outperformed the entire S&P 500 Index (SPX) when Apple has dropped by more than 30%, according to Bank of America Merrill Lynch.
Apple's Weighting In Key Indexes, ETFs
Significance For Investors
While the SPY is designed to track the performance of the S&P 500, the QQQ follows the Nasdaq 100 Index (NDX). According to BofAML, Apple represented 20.5% of the tech sector's market value at its peak in Oct. 2018, down significantly from 27.3% at its 2012 peak, the report notes.
The recent selloff in Apple is a result of both company-specific and macro factors, per BofAML, which concludes that "Tech will not likely U/P [underperform] as much as it did in 2012." Rather, they say, "We remain overweight Tech as valuations are already discounting much of the downside risk for Tech."
"The S&P 500 Technology sector has never outperformed the S&P 500 when AAPL has plummeted more than 30%." -- Bank of America Merrill Lynch
Since it became the world's largest company by market cap in 2011, Apple has had three big selloffs, per BofAML. It dropped by 44.4% from Sept. 2012 to April 2013, during which time the tech sector underperformed the S&P 500 by 18 percentage points. While Apple fell by 32.1% from Feb. 2015 to May 2016, tech underperformed by 8 percentage points. During the 36.3% dip by Apple from its all-time high set in intraday trading on Oct. 3, 2018 to the close on Jan. 7, 2019, tech has underperformed by 5.5 percentage points.
The selloff in 2012-13 was driven by concerns about a lack of innovation at Apple, while slowing growth in China, which had been Apple's fastest-expanding market, touched off the 2015-16 decline, per BofAML. Analysts at the firm estimate that 60% of a recent 7.7% cut in revenue guidance by Apple is the result of a 23% reduction in projected sales in China.
Apple stock is held by 260 U.S.-based ETFs and it represents 2.93%, on average, of the portfolio value of U.S.-based ETFs, per ETF.com. The same source calculates that 291.8 million Apple shares are held by ETFs, which is about 6% of its shares outstanding. Overall, institutions hold 59.9% of Apple's shares, according to Fidelity. These include mutual funds, ETFs, and other investment managers.
"We think the market is already pricing in much of the downside risk for Tech...suggesting attractive risk-reward ratios from here, especially if we get a favorable trade deal with China," the report concludes. Also, because "the smartphone market is much more mature now than it was back in 2012-13...slowing phone sales pose less risk to the [tech] sector today," BofAML says.
If Apple stock really has hit a low, recent history suggests that the tech sector is poised for significant outperformance. After Apple's troughs in 2013 and 2016, the tech sector outperformed the S&P 500 over the next 12 months by 7.2 and 21.9 percentage points, respectively, per the report. Excluding Apple, the rest of tech outperformed by 2.1 and 10.7 percentage points, respectively, during these periods.
However, should global economic growth continue to decelerate, and should trade conflict persist between the U.S. and China, the outlook for Apple and the tech sector as a whole will remain clouded.