Apple Stock: iPhone 14 Doesn’t Matter Now, Here’s What Does

Flat Lay of different apple products on a grey background.

Shahid Jamil

Down 20% for the year, Apple (NASDAQ:AAPL) has stolen the headlines lately for the out-of-the-gates performance of its new lineup of iPhone 14 devices. Bulls celebrated what seemed to be an overwhelming demand for the Pro models, leading the share price to spike in the second week of September. Then, Bloomberg reported on possible production cuts late last month, and Apple had its worst week of share price performance since March 2020.

While the debate around the iPhone 14 cycle may be important for long-term investors, I don’t think that it will dictate the direction of the stock in the near term (think one to as many as six months). Much more important, in my view, are the macroeconomic developments and how the market will react to them through the end of 2022, maybe into the first half of next year. Below, I present some data to support my views.

Apple and the S&P 500: correlations

Not much of a surprise, Apple tends to behave in line with the US equities market. Since 2007, when the late Steve Jobs introduced the first version of the iPhone and kickstarted a new era for the Cupertino company, the daily returns of Apple stock have correlated with those of the S&P 500 (SPY) at a factor of +0.66 — as a reminder, +1.0 means perfect positive correlation, while zero means no correlation at all (a good example of the latter is the relationship between stocks and gold over the past couple of decades).

A more important observation is that this positive correlation has not stayed steady throughout the entire period. The chart below, which shows the three-month rolling correlation between AAPL and SPY since 2007, suggests the following:

  1. Correlations have swung within a range of around zero to just below +1.0
  2. Correlations have stayed particularly high since around 2018, never dipping below +0.5 for more than a couple of weeks
  3. Correlations were particularly low around events that impacted Apple specifically, more so than the market at large (see the three data labels displayed below)

AAPL vs. S&P 500: 3-Month Correlation Since 2007

DM Martins Research, data from Yahoo Finance

The second bullet point above can be explained in a couple of ways. First, Apple now represents a much larger piece of the entire US stock market — thus “becoming the market”, in a way. Second, the 2018-2022 period was marked by a tide-lifts-all-boats environment of economic expansion and near-zero interest rates, in 2018 and 2019, and by the events surrounding COVID-19, which were highly impactful to virtually every company and stock.

But I want to focus a bit more on the third bullet point above. The rare moments of low correlations between Apple and the S&P 500 happened in mid-2007, late 2013, and early 2017. These were pivotal moments for Apple, more so than for the S&P 500.

Once again, 2007 marked the beginning of the iPhone era, which began to transform Apple into the company that it is today. As described by Reuters back then, investors were highly bullish about Steve Jobs and Co.’s novel idea to “combine a wireless phone, web browser, and media player” into one single portable device. The result was a share price that ran rampant following the company’s historic product announcement (see below).

AAPL vs SPY price
Data by YCharts

In 2013, Apple’s P/E reached what is now an unimaginable low of 10x, following a period of underperformance: loss of market share to Android, the first profit decline in nine years, shrinking margins, etc. Maybe investors saw the opportunity to buy the dip and loaded up on AAPL, pushing the stock higher. But the event that I think better explains the detachment in performance between Apple stock and the rest of the market in 2013 was the beginning of Tim Cook’s aggressive plan to buy back shares.

Notice below that Apple’s share count starts to decline precipitously in mid-2013 (note: the purple line represents the number of shares outstanding, and the orange line shows the dollar amount spent each quarter to buy back shares). Shortly thereafter, Apple stock began to recover, moving around independent of what had been happening to other stocks in the market.

AAPL shares outstanding and net common equity issued
Data by YCharts

Finally, early 2017 was particularly great for Apple (also for the rest of the market, just not as much) because it marked the company’s recovery from a disastrous 6S cycle. It was also around that time that the services business began to gain notoriety, with segment growth rates surpassing 20% and moving the needle at boosting total company margins. See the chart below.

Apple vs SPY price change
Data by YCharts

iPhone 14: not enough of a differentiator

The takeaway here is that, if history can serve as a guide, Apple is most likely to lavishly outperform (or underperform) the market if a meaningful company-specific event takes place. Could the launch of the iPhone 14 be this event? To me, the answer is a clear no.

As I discussed a few days ago, risk assets (think not only stocks but also bonds and commodities) have been going through their worst year of performance since 1970 at least, if not much longer. Rampant inflation and rapidly rising interest rates that don’t seem limited by a consensus ceiling have been highly disruptive to asset prices. Further deterioration here should spell trouble for the S&P 500 and Apple alike, while the eventual end of the current economic crisis will likely serve as the key catalyst for both to finally soar towards all-time highs.

As a long-term investor, I do care about the iPhone 14 cycle, and probably more so about how the company may choose to transform its product and service portfolio going forward — that is, when and how Apple will enter the mixed reality and autonomous vehicle spaces in the next 12 months to five years. But in the shorter term, I believe that the debate will center around the macroeconomic landscape, all else being little more than noise for now.

Be the first to comment

Leave a Reply

Your email address will not be published.


*