The world's biggest technology companies are almost incomprehensibly large at this point. Add up the market caps of the four largest U.S. companies -- Apple (AAPL -1.04%), Microsoft, Alphabet, and Amazon -- and you get a combined market value of just under $6 trillion. But Apple has stood above the rest for the last few years. Standing as the only company with a market cap of over $2 trillion right now, the iPhone and computer hardware maker has been one of the best-performing stocks of all time.

But will Apple remain the largest company by market cap in the world in 2023, or could it give up its No. 1 spot?

Apple won't be dislodged from its dominant market position

The amazing thing about Apple's ascendance is that its primary business is in a notoriously difficult space: consumer electronics. Steve Jobs, through a remarkable marketing strategy that elevated Apple products above the fray, put the company in a position that has allowed it to consistently sell its iPhones, iPads, AirPods, and more at premium prices compared to the products of its rivals. For example, the newest iPhone sells for over $1,000 in the United States, while the latest Google Pixel sells for just $599. Yet about half of U.S. smartphone buyers keep purchasing Apple devices.

Apple now has leading positions in the smartphone, tablet, and wearables markets, at least in wealthy Western and Asian countries. For fiscal 2022, which ended Sept. 24, Apple did $316 billion in product sales, up from $297 billion a year prior. It also has built a high-margin software and services business to go along with its hardware. This includes fees from the App Store and a multibillion-dollar annual payment from Google to put Google Search on iPhones, as well as tens of millions of subscriptions to Apple Music and Apple TV. Last year, the services segment did $78 billion in revenue, up from $68 billion in 2021.

Recession, inflation, and a reliance on China are real risks

The beauty of Apple's services strategy is that it doesn't require people to make new hardware purchases year after year. This segment, which now makes up 20% of Apple's overall sales, should be somewhat insulated in a recessionary environment. But the other 80% of the business still relies on consumer discretionary purchases. And consumers' pockets are getting pinched.

First, we've had over a year of high inflation, which has been eating into people's budgets and has caused many to cut back on discretionary spending. Second, there's a significant risk that the Federal Reserve's efforts to bring inflation back down by aggressively hiking interest rates will contribute to the economy tipping into recession next year. Third, personal savings rates are at an all-time low in the United States.

During the earlier stages of the pandemic, when many people were unable to travel, go out to eat, or spend on a range of other costly things they previously did, savings rates exploded to 15% to 30% of personal income -- way above the long-term average range of 5% to 10%. Now, savings rates are just 2.3%. By definition, this change in the savings rate means that many people are depleting the cash they saved during the pandemic -- or have depleted it already. Some of that excess cash doubtlessly went toward purchases of Apple products. That dynamic won't repeat itself in 2023.

There are also major looming concerns about Apple's supply chain, which is centered around China. Workers at Foxconn's iPhone factory have engaged in protests in recent months, impairing Apple's ability to ship its products on schedule.

Also, China recently began relaxing its strict zero-COVID policy, fully opening up its economy for the first time in years. At first glance, this might seem like a positive thing for Apple's supply chain, but the knock-on effects of letting COVID-19 run rampant in China are unknown. While the country's official statistics show that more than 90% of its population has received their initial vaccination series, the percentage who have gotten boosters is much much lower, and several recently published modeling studies forecast that more than a million people in China will die of COVID-19 in the coming months or over the next year. That could cause major disruptions to the Chinese economy, which in turn could hinder Apple's ability to get its products manufactured.

If you look at Apple's trailing annual free cash flow of $111 billion, the stock does not seem that expensive. With a market cap of $2.1 trillion, it trades at a price-to-free-cash-flow ratio of 19, which is actually below the Nasdaq Composite's average of 21. But investors are less interested in how much cash a company generated in the past, and more concerned with the future cash flow it will produce for shareholders. Based on today's low consumer savings rate and the risk that Chinese manufacturing will experience major hiccups, I think 2023 could be a tough year for Apple's business. I would not be surprised to see it generate less free cash flow in fiscal 2023 than it did in fiscal 2022.

AAPL Free Cash Flow Chart

AAPL Free Cash Flow data by YCharts.

Which company could top Apple?

I think it is unlikely Apple will still be the largest company in the world by the end of next year. But which one will replace it? Amazon and Alphabet both look cheap right now, but would need to go on huge bull runs to pass Apple's market cap, and it seems improbable that they could do so in just one year. My leading candidate to leapfrog Apple is Microsoft, which has a much more resilient business model than the iPhone maker.

Much of Microsoft's business is based on selling subscriptions for enterprise software and providing cloud computing services. Neither one of those is reliant on consumer spending, and therefore, we can expect those businesses will be more resilient in a recessionary environment. With Microsoft valued at $1.8 trillion today, I'd bet that it -- not Apple -- will hold the title of world's most valuable company by the end of 2023.