Relative to the Dow Jones Industrials, the Nasdaq Composite has risen to its highest level in 10 years, but unlike in the dot.com era, today there are substantial earnings behind recent technology stock price gains.Two examples of strong tech stock earnings came after Tuesday’s market close: IBM and Apple. Along with the strong results reported by Intel last week, today’s reports suggest a quickening of sales as 2010 was ending and 2011 beginning. IBM’s sales finally surpassed the Q4 2007 record level, rising almost 7% in the latest quarter, the best gain in two and a half years. Apple’s December-quarter sales were more easily a record, rising 71% on top of the year-earlier quarter’s 54% gain (to a level equal to 92% of IBM’s revenues). Both of these results exceeded Wall Street forecasts, by a wide margin in Apple’s case. While the chart below shows that relative to the DJIA the Nasdaq has only been higher for brief periods in 1983 and in 1998-2001, there is some basis in the earnings and sales growth of Apple and Intel for higher relative valuations for those stocks than for the more blue-collar stocks in the DJIA, such as IBM. One suspects that AAPL shares will rise at Wednesday’s open, as the strong earnings news offsets the uncertainties created in Tuesday trading by the announcement of Steve Jobs’s medical leave of absence. They may even take the rest of the equities market higher with them, at least for the short run, adding on to Tuesday’s gains (DJIA, +0.4%; Nasdaq, +0.4%; S&P 500, +0.1%; S&P 400 MidCaps, +0.9%).
Treasury bond prices sold off on the better stock market pricing, with the 10-year T-note losing roughly one-third of a point, its yield climbing to 3.37%. Yields have largely been in a trading range of 3.30%-3.50% (for 10-year maturities) for more than a month.
INVESTMENT OUTLOOK…The respectable year-end rally in stocks, fashioned out of improvement in leading economic indicators, has continued early in 2011. At some point, the U.S. economy will have to do without the trillion dollar stimulus packages – past and prospective – that have been contributing to the quickening seen lately in economic activity. In the end, strong corporate earnings can overcome a lot of this market’s shortcomings, and we judge the profits outlook for 2011 to be good. With respect to bonds, we are not completely comfortable with the near unanimity reflected in the markets that interest rates can only go higher in 2011; our forecast is for a modest elevation of yields as the year progresses. Stock market volatility has receded from the awful levels of 2008-09, but we would not be surprised if there are occasional bouts of volatility popping up through 2011, although so long as earnings prospects remain favorable the general trend of stock prices figures to be up.
Copyright © 2011 by Wright Investors’ Service, Inc.