With earnings season approaching and a possible market correction on the horizon, one question investors may have is whether S&P 500 company earnings will be strong enough to continue the bull market we have seen so far in 2012, resulting in an approximate 12% increase in the S&P 500 since the beginning of the year. Seven of the nine main sectors of the S&P 500 have seen increases, with only the Energy and Utilities sectors holding the S&P 500 from experiencing more consistent gains. [Related: How To Earn A 9.25% Gain In 30 Days While Waiting For Apple’s Dividend]
One large S&P 500 company earnings factor to keep an eye on in regards to overall S&P 500 performance is the performance of Apple Inc. (NASDAQ:AAPL). In fact, without Apple’s presence in the S&P 500 Index, the projected earnings growth rate for the Index would be -1.6%. Apple is expected to be the largest contributor to the S&P 500′s earnings growth for Q1 2012 and the index might need an apple a day as so far sixty-six companies have issued negative Earnings Per Share (EPS guidance) for Q1 2012, down from the 82 companies that issued negative EPS guidance for Q4 2011.
Apple will report earnings on April 24th and no doubt that report and call will be the most widely watched of the current earnings season. [Related: Apple Inc.’s Stock Is Entering A Euphoric “Bubble” Stage; A Bad Sign For The Markets?]
In short, Apple’s stock has helped to bolster our current bull market because the company’s market-cap of over $575 billion enables the company to push the market along with it via momentum. As long as Apple’s stock can continue to rise, there is no reason why it can’t continue to push the S&P 500 (and the stock market as a whole) to higher levels. The concern is whether there will be a pullback on Apple stock at some point which is certainly a possibility, as virtually every stock experiences pullbacks as investors seize profits.
Do not underestimate Apple just yet, however, as the company has established a business model that continues to develop new generations of high-demand, new-tech products. This business model has proven successful, especially in the last two main products released by Apple, the iPhone 4S and “the new iPad.” In fact, there are already rumors spreading about a possible new iPhone 5 and an even newer version of the iPad 3.
Combine these popular products with Apple’s impressive line of computers, iPods, iTunes, and the presumption (speculation?) that Apple’s stock can continue climbing over the long term, and you have a strong case for a strong S&P, even if there is an occasional minor pullback or two in the short-term. This is why a few analysts have already projected Apple’s stock to reach $1,000 at some point in the not-too-distant future. These $1000-per-share forecasts help to bolster the case that the S&P 500, as well as the stock market, can both continue this bullish run for the long term. [Related: 7 Reasons Apple’s Stock Could Be The Short Of A Lifetime]
As long as no major catastrophes or surprises occur, it is likely that S&P 500 companies’ earnings can continue to rise over the long term. However, over the short term, it appears that earnings for this quarter are going to slow due to headwinds from China, Europe, and a slowdown in US growth.
Some ETFs to watch for earnings season include the SPDR S&P 500 ETF (NYSEARCA:SPY) and the Technology SPDR ETF (NYSEARCA:XLK), Vanguard Information Technology (NYSEARCA:VGT) along with the PowerShares QQQ Trust Series 1 ETF (NASDAQ:QQQ); all of these ETFs will likely be affected by Apple performance and the overall earnings season. [Related: Does Google’s Android Have Any Chance Against Apple Inc.’s iPhone?]
Bottom line: With employment growth slowing, earnings growth apparently slowing, problems in Europe and seasonality working against higher prices, the most likely scenario is for a sideways to downwards market in response to slowing Second Quarter earnings on the S&P 500 (NYSEARCA:SPY) and in the Tech Sector (NYSEARCA:XLK). The slowdown could become an outright tumble if Apple (NASDAQ:AAPL) should fall from the tree.
Disclaimer: Wall Street Sector Selector actively trades a wide range of exchange traded funds (ETFs) and positions can change at any time.
John Nyaradi is Publisher of Wall Street Sector Selector and Senior Vice President of Private Client Services for ProfitScore Capital Management, Inc. Get a free Special Report from Wall Street Sector Selector.