Apple’s earnings will test stock’s status as the AI safety play

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Or sign-in if you have an account.Margins are where the AI spending spree could hit Apple, as all the capex sends demand and prices for components like memory chips soaring. Photo by David Paul Morris/BloombergWall Street’s sudden aversion to AI spending has made Apple Inc. this year’s Big Tech stock market star. But the iPhone maker’s earnings after the close Thursday could remind investors of the hurdles it still faces.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountApple shares are on a roll, rising 15 per cent in July and 22 per cent in 2026, by far the best annual performance among the Magnificent Seven technology giants. It also has reclaimed the title of biggest company in the world with a market capitalization that has crossed US$5 trillion several times in the last few days, joining Nvidia Corp. as the only firms to pass that threshold.The rally is largely a result of Apple’s status as a haven in periods of tech volatility. As investors sour on the companies spending hundreds of billions of dollars on AI and the beneficiaries of that largesse, shares of the so-called hyperscalers building massive data centres for cloud computing and the chipmakers and memory manufacturers providing the equipment to run them are struggling.Canada's best source for investing news, analysis and insight.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Investor will soon be in your inbox.We encountered an issue signing you up. Please try againApple, however, has largely sat out the the AI arms race. At this time last year it was being criticized for that, and the stock underperformed in 2025 as big spenders like Alphabet Inc. and memory-chip makers like Micron Technology Inc. and Sandisk Corp. raced ahead. But that same dynamic is now a surprising source of strength.“The outperformance amid the rotation is more than anyone would have expected, since memory is the number one thing investors are focused on,” said Dan Morgan, senior portfolio manager at Synovus Trust Co. “That the stock has been doing so well in spite of this is something of a head-scratcher.”Shares fell as much as 2.5 per cent on Thursday, but Apple’s recent performance is especially notable relative to the rest of the tech universe. The Nasdaq 100 Index has lost 7.4 per cent in July. The divergence between the index and Apple this month is the widest in 20 years.“Everyone’s calling the Apple trade, and you may have already heard this, the anti-capex AI trade,” said Gerald Sparrow, chief investment officer of the Sparrow Growth Fund, which owns Apple shares.That trade was on display Wednesday. The tech-heavy Nasdaq 100 sank 2.1 per cent to bring its decline from a June 2 high to 11 per cent, meeting the technical definition of a correction. The Philadelphia Stock Exchange Semiconductor Index, or SOX, dropped 5.3 per cent and extended its July decline to 27 per cent, which would be its worst month since September 2001. Meanwhile, Apple slid less than one per cent after rising almost six per cent in the previous three sessions.Two big AI spenders, Microsoft Corp. and Meta Platforms Inc., reported earnings after the bell on Wednesday, and Meta shares fell as Facebook’s parent raised the lower end of its capex target for 2026. This comes on the heels of Alphabet Inc.’s results last week, which were strong on many metrics but the stock got hit because the company raised its capital expenditures estimate. Microsoft soared on its report.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.Amazon.com Inc., another major AI player, reports earnings alongside Apple on Thursday after the market close. Its shares rose 4.7 per cent on Thursday, rebounding after a seven-day retreat.“It feels like people are being pushed into Apple because they’re souring on the alternatives within tech,” said Peter Andersen, chief investment officer of Andersen Capital Management. “It certainly hasn’t been advancing because of improvements in its own fundamentals.”Apple is projected to post an 18 per cent increase in net income and 16 per cent growth in revenues for its fiscal third-quarter, which ended June 30. But those figures are expected to fall into the single digits for the rest of the year. Its operating margin is shrinking and expected to tumble into the red by the end of 2026.Margins are where the AI spending spree could hit Apple, as all the capex sends demand and prices for components like memory chips soaring. An index of spot prices for dynamic random-access memory, or DRAM, chips has risen more than 840 per cent since the end of August. Memory represents between 10% and 20 per cent of the cost of building a smartphone, according to technology research firm IDC.Apple recently raised prices on a number of products, but not iPhones. Memory costs are likely to be a focus of Apple’s earnings report, which will be the last of Tim Cook’s tenure as chief executive officer and the final one before the expected arrival of the foldable iPhone in September.The issue with margins is particularly acute because Apple’s rally has made its stock increasingly expensive. The shares trade at 35 times earnings over the next 12 months, near the highest since January 2008, well above their long-term average and a substantial premium to the Nasdaq 100.“Everything would have to go completely right for Apple to maintain its valuation, and any hiccup in the earnings call could bring it down,” Andersen said.In addition to Apple’s pricey valuation, crossing the US$5 trillion mark in market capitalization could also signal that the stock is ready to fall. Each time Apple has reached a new trillion-dollar threshold, the stock has “underperformed the S&P 500 in the following six-month and 12-month periods,” Baird analyst William Power wrote in a note to clients on Tuesday.But more than anything in Apple’s results, the biggest risk to the stock price is likely the durability of the rotation away from the AI trade. If sentiment improves and those stocks come back into favour, Apple shares will almost certainly feel the pinch.“Apple has really benefited from the tech rotation, and it is fair to think that if the pendulum swings back toward AI, it could be very vulnerable,” Synovus Trust’s Morgan said. “Unless the results show a real beat relative to expectations, it could get a real haircut.”—With assistance from Rainier Harris, Subrat Patnaik, Yoolim Lee, Vlad Savov and David Watkins.We apologize, but this video has failed to load.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.