Apple vs. the FTSE 100 and what to watch in NFPs this week

News headlines were aghast on Wednesday after the surge in Apple’s share price meant that it’s market capitalisation was larger than the entire FTSE 100. Apple’s market cap is approx. $2.3 trillion, while the market cap of the FTSE 100 is $2.1 trillion. This is a stark reminder of how the FTSE is struggling to keep up with its US counterparts largely due to the lack of any tech titans in the UK index. However, does this comparison make any sense, and if you are an avid trader of UK shares should you throw in the towel now? 

We believe that the answer to that question is no, and we will try to break down the Apple vs. FTSE debate to its constituent parts to help you to make sense of it and decide what steps to take next on your trading journey. 

·      Apple has grown so fast: in just 21 weeks Apple’s market cap has doubled, that means that back in January, although Apple was still a huge tech behemoth, its size was barely comparable with the FTSE 100. A lot has changed since then, notably the coronavirus pandemic and the encroachment of technology into everybody’s lives – we now depend on it to work remotely, exercise, shop and even our health depends on it since many health services have gone online in recent months. Apple is one of the most important components of the world’s online infrastructure – it provides the hardware and operating systems for a brand that large parts of the world love. Thus, it is no wonder that Apple’s market cap is worth more than the FTSE, since UK companies make up a smaller slice of the online pie. 

·      FTSE and Covid: the FTSE 100 has suffered greatly from the Covid pandemic. The energy, mining and banking sectors have suffered this year from economic recession, a sharp drop in oil prices earlier in the year and banks are struggling with the double whammy of ultra-low interest rates combined with rising bad loans. This has meant that the recovery for the FTSE 100 is far behind that of its US and some of its European peers. On the plus side, the valuations of some UK companies are looking attractive compared with their US counterparts. Covid has also hastened a shift in the make-up of the FTSE 100. The last two quarters have seen EasyJet and ITV get booted out of the FTSE 100, along with other companies that have seen their market cap fall due to losses associated with the pandemic. ITV was replaced by B&M, a discount retailer. The irony is that a digital company, ITV, was replaced by a bricks and mortar retailer. We are in strange times, and while Netflix’s share price reached a record high earlier this year, the likes of ITV are struggling. Perhaps UK broadcasters should move to a subscription model instead of relying on advertising revenue that can disappear during times of economic stress. 

·      Competition concerns: There are some who argue that the tech giants, including Apple, are gaining an unfair advantage by quashing competition and no wonder their market caps are so huge. The top 5 biggest US tech giants earned $500mn a day from June 2019- June 2020. Due to their pervasiveness and enormous size, political risks for the tech barons are rising. The US Congress has conducted a committee to look at the practices of US tech giants and Apple is under a separate investigation by the European authorities for potential uncompetitive practices with its App store. We have mentioned before that the biggest risk for tech right now is political risk. Apple’s investigation in Europe is concerning, as it could end the practice of people having to buy apps from Apple’s AppStore to play on Apple devises. This could be costly. Right now, we are a way off from a decision being made on Apple’s competitiveness, however, if you are concerned about the political risk associated with some tech companies, then you may want to look at Tesla. It is planning a $5bn stock sale to raise cash. This is clever move and suggests that Tesla is trying to benefit from the massive increase in its share price this year. The stock sale is likely to attract the millions of electric evangelists in the world who would kill to get their hands-on Tesla stock. For those of a more contrarian nature it could be a sign that Tesla’s executive board are worried that the stock price is peaking, and want to benefit before it’s too late, especially since they are using that cash to pay off some of Tesla’s massive debt load. 

·      What next? For traders everywhere, the big question is, what to do next. Do you ditch big tech because you think it is a bubble that is about to explode? Or do you stick with tech because it’s the biggest momentum trade going? While I believe that the market will eventually start to look at the value trade and shift away from highly valued companies to cheaper companies, it’s hard to make the case that the tech rally is finished. Apple’s stock split earlier this week caused a bit of a pullback, along with better than expected ADP private sector payrolls data on Wednesday that helped companies that are leveraged to the real economy outperform tech. It will be interesting to see if the tech-mad retail traders buy the dip in Apple, initial support is found at $124.70. Overall, if the tech giants can keep pulling in $500mn a day in net profit then it’s hard to see a sharp sell off any time soon. 

Lastly, it is worth mentioning NFPs, which will be released on Friday 1330BST. The market is expecting 1.4mn jobs were created in August. At this stage of the US’s economic recovery, we believe that it’s a binary outcome for stocks on the back of last month’s labour market report. Anything smaller than expected could cause stocks to sell off, although we believe that tech stocks’ decline will be limited due to the defensive nature the tech sector has acquired during the pandemic. In contrast, a stronger labour market report is likely to be good news for economically sensitive stocks like retailers and banks, and we may see tech lag behind as we end the week.