Apple's Size Clouds Market

To Get a Picture of Corporate Health, Analysts Cut Tech Giant Out of the Frame

The Wall Street Journal

In analyzing U.S. corporate earnings and stock-market trends, apples-to-apples comparisons may now require tossing out the Apple.

Apple Inc.'s success selling consumer gadgets has pushed its share price above $500, cementing its place as the U.S.'s largest company, with a market capitalization of $475 billion. But its gargantuan size is making it difficult for Wall Street to get a big-picture view of the earnings and margins for other American corporations.

As a result, some equity analysts are cutting Apple out of the frame—and finding a dimmer outlook for the broader market.

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Earlier this month, Jonathan Golub, the chief U.S. equity strategy at UBS AG, caused a stir among his clients by publishing two versions of his regular quarterly earnings update: one for the companies that make up the S&P 500, and another for what he calls "S&P 500 ex-Apple."

"In two and a half years, I haven't got as much response as I did to that note," Mr. Golub says.

Strategists at Morgan Stanley, Goldman Sachs, Barclays Capital and Wells Fargo have done similar analyses recently to offset Apple's impact.

The results are striking: For all the companies in the Standard & Poor's 500-stock index, earnings are on track to post a 6.6% year-on-year rise in the fourth quarter. Once Apple's earnings are factored out, the expected fourth-quarter gain shrivels to just 2.8%, according to UBS.

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"By stripping away that one single company, it is like seeing light through a prism—you see things more clearly," Mr. Golub says.

Apple's unique combination of torrid growth and massive size means that its success or failure alone can change how earnings season is viewed.

While most U.S. companies have struggled to meet earnings expectations, the Cupertino, Calif.-based maker of iPads and iPhones has surpassed even the most bullish of expectations, reporting $13.1 billion in profits during the fiscal 2012 first quarter that ended Dec. 31, more than double that of a year earlier. Revenue soared 73% to $46.3 billion. Those earnings account for about 6% of the S&P 500's fourth-quarter earnings, according to S&P Indices, making Apple the biggest earnings contributor to the S&P 500.

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The effect is more acute within the technology sector. David Kostin, chief U.S. equity strategist at Goldman Sachs, forecasts that the technology sector will increase its earnings by 21% in the fourth quarter compared to a year earlier. But that would shrink to roughly 5% once Apple is factored out.

"What's happening with Apple is real, because Apple's earnings are real and any wealth accruing to Apple gets into the hands of U.S. shareholders," said Barry Knapp, chief equity strategist at Barclays Capital. "But to actually be able to look at trends and look at what's happening to [other companies], not just the one that's so exceptional, it is important to strip Apple out."

On Tuesday, Apple's stock rose for the eighth consecutive day, gaining $6.86 per share, or 1.36%, to a fresh record of $509.46 a share, even as the broader market finished flat. The stock took just 34 days to go from below $400 to above $500. Since Thanksgiving, Apple has surged 40%, more than double the S&P 500's 17% advance.

That performance has boosted the broader benchmarks, many of which give heavier weighting to bigger companies like Apple. Apple's share of the S&P 500, is 3.8%—more than Exxon Mobil's 3.3%, Microsoft's 1.9% and International Business Machines' 1.85%.

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On the Nasdaq-100 index, which includes the 100 largest Nasdaq-listed companies, Apple has a 16.6% weighting, more than Google, Intel and Amazon.com combined. The Nasdaq-100 is closely followed by investors, who have made the PowerShares QQQ exchange-traded fund that tracks the index one of the most actively traded ETFs.

Apple isn't the first U.S. company to win an "ex-" designation. In 1985, International Business Machines saw its market value rise so high—to $95.6 billion—that it accounted for 6.4% of the S&P 500, according to Howard Silverblatt, senior index analyst at S&P Indices. The firm subsequently calculated separate index series for the "S&P 500 ex-IBM," as well as one for the "S&P 500 ex-General Motors."

Since 1980, five companies—IBM, General Electric, AT&T, Microsoft and Exxon Mobil—have at some point had a heavier weighting on the S&P 500 than Apple did at the end of December. Even so, Mr. Silverblatt says, "the impact that Apple has is huge," adding that more than 10% of the S&P's 7.4% gain this year can be chalked up to Apple.

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After the financial crisis of 2008, many strategists—wary of the reliability of banks' earnings figures—began reporting results for the S&P 500, excluding financial stocks.

One of the reasons Apple's market capitalization is so high is its $100 billion cash pile. Yield funds, which typically seek out stocks that pay high dividends but avoid high-growth stocks, have nonetheless rushed into Apple. The company doesn't pay a dividend but some yield-fund managers expect it will initiate one soon.

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