MarketView for January 23

Summary

The S&P 500 rose for a sixth day on Wednesday an unsurprising move given the stronger-than-expected profits from IBM and Google. The benchmark S&P 500 is a mere 0.35 percent away from hitting 1,500, a level not seen since December 12, 2007. However, Thursday could be a different day altogether, given Apple’s after-hours miss. Nonetheless, on Wednesday, the S&P 500 index was just 4.7 percent from its all-time closing high as IBM's and Google's earnings, released after Tuesday's close, followed on the heels of stronger economic data.

However, Apple, still the largest domestic publicly traded company, fell 8 percent in extended trading after sales of its flagship iPhone came in below analyst targets and quarterly revenue slightly missed Wall Street expectations.

Shares of IBM rose 4.4 percent during regular market hours to $204.72, providing just about all of the Dow's 67-point gain. Also helping the tech sector was a 5.5 percent rise in Google to $741.50. The Internet search company reported its core business outpaced expectations and revenue was higher than expected.

Netflix gained 32 percent, above $136, after the video subscription service said it added subscribers in the United States and abroad and posted a quarterly profit. LED maker Cree rose 22 percent to $40.85 after it forecast a higher-than-expected third-quarter profit, and reported results above analysts' estimates. Upscale leather goods maker Coach fell 16.4 percent to $50.75 after reporting sales that missed expectations.

Thomson Reuters’ data through Wednesday indicated that of the 99 S&P 500 companies that have reported earnings so far, 67.7 percent have topped expectations, above the 65 percent average beat over the past four quarters. Overall, S&P 500 fourth-quarter earnings rose 2.8 percent, according to Thomson Reuters data. That estimate is above the 1.9 percent forecast at the start of earnings season.

Manufacturers sounded a confident note about their expectations for 2013 on Wednesday as fears of the year-end "fiscal cliff" faded into memory. During the regular trading session, about 6.1 billion shares changed hands on the three major equity exchanges, a number that was below the 2012 daily average of about 6.45 billion shares.

Apple Disappoints Street

Apple missed Wall Street's revenue forecast for the third straight quarter after iPhone sales came in below expectations, fanning fears that its dominance of the mobile industry was slipping. Shares of the world's largest tech company fell 10 percent to $463 in after-hours trade, wiping out some $50 billion of its market value - nearly equivalent to that of Hewlett-Packard and Dell, combined.

According to the company’s announcement, Apple shipped a record 47.8 million iPhones in the December quarter, up 29 percent from the year-ago period. But that lagged the 50 million that the Street was looking for.

Expectations heading into the results had been subdued by news of possible production cutbacks by some component suppliers in Asia, triggering fears that demand for the iPhone, which accounts for half of Apple's revenue, and the iPad could be slowing.

Apple projected revenue of $41 billion to $43 billion in the current, second fiscal quarter, lagging the average Wall Street forecast of more than $45 billion.

Fiscal first quarter revenue rose 18 percent to $54.5 billion, below the average analyst estimate of $54.73 billion, though earnings per share of $13.81 exceeded the Street consensus of $13.47, according to Thomson Reuters I/B/E/S.

Apple also undershot revenue targets in the previous two quarters, and these results will prompt more questions on what Apple has in its product pipeline, and what it can do to attract new sales and maintain its growth trajectory, analysts said.

Net income of $13.07 billion was virtually flat with $13.06 billion a year earlier on higher manufacturing costs. The year-ago quarter also had an extra week compared to this year. Gross margins consequently slid to 38.6 percent, from 44.7 percent previously.

Shares of several of Apple's suppliers crumbled. Chip suppliers Skyworks and Cirrus Logic both fell more than 6 percent. Qualcomm was down 1.8 percent.

Apple shares are down nearly 30 percent from a record high in September, in part on worries that its days of hyper growth are over and its mobile devices are no longer as popular. Intense competition from Samsung's cheaper phones - powered by Google's Android software - and signs that the premium smartphone market may be close to saturation in developed markets have also caused a lot of investor anxiety.

Meanwhile, sales of the iPad came in at 22.9 million in the fiscal first quarter, roughly in line with forecasts.

On the brighter side, Chief Financial Officer Peter Oppenheimer told Reuters that iPhone sales more than doubled in greater China - a region that Apple Chief Executive Tim Cook has vowed to focus on as its next big growth driver.

The company will begin detailing results from that country going forward. Revenue from the region totaled $7.3 billion, up 60 percent from the year-ago December quarter.

In an unusual move for Apple, which typically does not respond to speculation, Cook addressed the production cutback rumors at length on the conference call and questioned the accuracy of rumors about its plans.

Media reports earlier this month said the company is slashing orders for iPhone 5 and iPad screens and other components from its Asian suppliers.

"Even if a particular data point were factual, it would be impossible to accurately interpret the data point as to what it meant for our overall business, because the supply chain is very complex," he said, adding that Apple has multiple sources for components.

"Yields might vary. Supplier performance can vary. The beginning inventory positions can vary. There's just an inordinately long list of things that would make any single data point not a great proxy for what's going on," he said.

Apple's initial iPhone and iPad mini sales were hurt by supply constraints, but Cook expects supply to balance demand for the iPad mini this quarter. He also acknowledged that iPad was cannibalizing its high-margin Macintosh computers, but said it was a huge opportunity for the company.

"On iPad in particular, we have the mother of all opportunities here, because the Windows market is much, much larger than the Mac market is," he said. And I think it is clear that it's already cannibalizing some."

In another departure from tradition, Apple intends to tweak the way it both reports results and publishes forecasts. Apart from breaking out results from China, the company also will no longer provide a single revenue or gross margin outlook. From Wednesday, it began providing the range it expects to hit, rather than the often-ludicrously conservative estimates that Apple was once notorious for. The new policy took many by surprise.