Apple’s Thursday earnings report was a mixed bag of clues to the health of the broader stock market. On the one hand, Apple marked $58.3 billion in first-quarter revenue. Apple’s $2.55 earnings per share were also up 4%.
Despite COVID-19’s unprecedented global impact, we’re proud to report that Apple grew for the quarter, driven by an all-time record in Services and a quarterly record for Wearables.
On the other hand, the earnings report revealed a plunge in iPhone sales last quarter. And the Cupertino company’s decision not to offer forward guidance for the quarter ending in June is a foreboding sign for the stock market.
It’s certainly a testament to the resilience of Apple to grow during the COVID-19 crisis. But we’ll have to wait and see how the second quarter affects its top and bottom lines.
The coronavirus pandemic didn’t crash the world economy and global asset prices until most of the way through February. And the first month of the new decade was a euphoric one for equities and consumers. Fed Chair Jerome Powell warned on Wednesday that :
The second quarter’s economic data will be worse than anything we have ever seen. I would say that it may well be the case that the economy will need further support from all of us if the recovery is to be a strong one.
The Q1 Apple earnings report confirms Powell’s expectations.
It reveals a partial picture of the collapse in consumer discretionary spending that drives the economy. That will crush corporate earnings in quarter two, leading to another painful adjustment in stock market valuations.
Revenue from iPhone sales took a 6.7% dive from $31 billion in last year’s first quarter to $28.9 billion this year. Apple stock (NASDAQ:AAPL) whipsawed on the earnings report in after-hours trading. AAPL jumped slightly on the revenue growth, but then almost immediately gave up the day’s 2% gains.
Plunging iPhone sales reveals an enormous crack in consumer spending power and confidence. When the second-quarter numbers are out, that crack will grow into a perilous delta between consumer confidence levels in January and now.
Back in January, consumer spending grew to record-breaking levels of confidence in the U.S. economy. At the height of the record-long economic rally, consumer confidence was crucial for stock market valuations deep in overbought territory.
In a bright December forecast for the 2020 stock market, Goldman Sachs chief equities strategist David Kostin said 70% of the economy was the U.S. consumer:
The consumer confidence is extremely high, and 70% of the U.S. economy is represented by the consumer.
Now consumers face devastating job losses and crashing income levels. Worse, they were caught holding the most household debt in history when the economy crashed.