Apple's iPhone Nightmare Threatens Entire Stock Market

Apple's iPhone Nightmare Threatens Entire Stock Market

Lucy Nicholson

Things just keep getting worse for Apple (AAPL) as the house that Jobs built comes under increasing pressure. The stock was smashed in early trading on Thursday after another round of bad supply chain news pushed shares under the $90 threshold, levels not seen since June 2014.

The Nikkei Asian Review warned that weak demand for the upcoming iPhone 7 — which reportedly will be just another modest refresh of the iPhone 6 form factor — is set to hit component suppliers hard later this year. Coming on the heels of a big earnings miss for Apple on the first ever drop in iPhone sales, this is fueling concerns about weak demand as the smartphone market gets saturated and the company’s pace of innovation slows.

Related: Wall Street Slumps as Apple Sinks to Two-Year Low

As a result, not only did AAPL violate recent support levels, but the widely held stock also lost its position as the world's largest by market capitalization to Alphabet (GOOGL) — a turn that puts the entire post-February market uptrend at risk.

A source from Taiwan Semiconductor Manufacturing (TSM), the maker of the latest A10 processors used in the iPhone 7, told Nikkei that chip shipments in the second half of the year will likely be down 20 percent to 30 percent from last year.

The CEO of Pegatron, an assembler of iPhone handsets, warned that after a first half without any good news, a possible second half rebound is clouded by "unfavorable uncertainties." iPhone panel supplier LG Display said its net profit for the quarter ending in May was down 99 percent from last year.

Analysts at Oppenheimer warned last month that Apple's weak performance is likely to continue until the late-2017 launch of a new iPhone form factor. They lowered their fiscal 2016 and 2017 earnings per share estimates to $8.24 and $9.18 from $9.18 and $10.44 previously.

Related: Four Reasons Apple's Earnings Miss Is Such a Big Deal 

Apple isn't alone in its woes. "The smartphone industry will continue to slow down this year," Richard Ko, a Taipei-based analyst at KGI Securities Co., told Bloomberg. "Competition will worsen and prices will likely continue to fall."

Apple's disappointing performance and large size has been a big drag on overall earnings growth for the stock market.

Ed Yardeni of Yardeni Research notes its $534 million earnings shortfall is the biggest Q1 earnings miss reported so far by any company and "decimated results for the Tech sector" overall. Excluding Apple's performance, the earnings growth rate of the S&P 500's tech sector improves to 4.6 percent from 1.7 percent while the overall S&P 500 earnings surprise increases to 5.7 percent from 4.9 percent.

AAPL Chart

AAPL data by YCharts

Along with weak retail earnings, the rising fears over the looming presidential election and the risk of a June Federal Reserve interest rate hike, the recent fall from grace of big-tech heavyweights like Apple is threatening to push the broad market out of a three-month topping pattern. Other big tech stocks showing weakness include the likes of Intel (INTC), Netflix (NFLX) and Microsoft (MSFT).

Related: US Companies Brighten Their Earnings Outlook

Apple, for its part, is down more than 31 percent from its high set early last year and has lost nearly 20 percent since mid-April. The Dow Jones Industrial Average, meanwhile, has spent the last two weeks testing its 50-day moving average near 17,600 after bulls once again got turned away from the 18,000 level, first crossed in 2014. Watch for a breakdown and a drop to the 200-day average near 17,100, as weakness in Apple encourages broad-based profit taking.