The Apple EconomyApple is now the second most valuable stock in the world, after Exxon ( XOM), in terms of market capitalization. However, it remains by far the most influential stock in global stock markets, from a technical standpoint, when other factors are taken into account, such as index weightings and dollar-weighted trading volume.
In terms of fundamental impact, the importance of Apple goes well beyond its top ranking in terms of EPS weighting (about 5%) in the S&P 500. As Apple's earnings go, so too will the earnings of dozens of Apple suppliers. Cirrus' ( CRUS) earnings warning on April 17, and the resulting 15% stock price collapse, which was based on a decline in Apple orders for one of its product lines, is just one example of how the fate of Apple is inextricably linked with the fate of many companies in the stock market -- particularly those that comprise technology sector indices, such as the Nasdaq 100 and index ETFs such as PowerShares QQQ ( QQQ). In particular, the probable secular decline in Apple's profit margins in the next few quarters and years, due to increasing competition, a commoditization of its products will most likely be mirrored by shrinking profit margins by Apple suppliers.
Broader Impact of Apple's PlungeThe most troubling thing for the market as a whole is that the worries about declining earnings in the "Apple economy" may serve as a psychological trigger that prompts many investors and traders to examine the deteriorating fundamentals in other sectors. For example, as a result of the ongoing crash in commodities prices, the EPS estimates of the entire basic materials sector of the S&P 500 are going to have to be revised drastically lower.
Dramatically declining PC sales have caused major stock-price declines for companies that are linked to the sector, such as Intel ( INTC) and Microsoft ( MSFT). Everywhere you look, EPS estimates seem to be under assault. Heading into first-quarter 2013 earnings season, negative pre-announcements were at their highest levels since those statistics have been kept. The S&P 500 has already experienced two straight quarters of year-over-year EPS contraction. A third-consecutive year-over-year decline would likely cause concern in some quarters that earnings have peaked and that this will signal a top in stock prices for this particular cycle.