Is the Dow's Rally Running Out of Steam?
While the Dow Jones Industrial Average (INDEX: ^DJI) has performed strongly so far up this year, up 5.45% on the year through today, that's nothing compared with another widely followed index. I'm talking about the tech-heavy Nasdaq (INDEX: ^IXIC) , which has already soared an astonishing 11.92% in 2012!
That's in large because technology is on fire and fueling both indexes' gains. Take Microsoft (NAS: MSFT) , for example. This company -- a member of both the Dow and Nasdaq -- has already risen more than 18% this year. Cisco (NAS: CSCO) , another member of both indexes, is already up 13% on the year.
A big part of this story is impressive earnings from some of the sector's largest companies. Leaders such as Microsoft, Intel, EMC, and IBM all have delivered earnings that beat expectations despite calls that technology spending would slow dramatically in 2012. As the economy shows signs of resilience and the leaders of technology give forward guidance hinting that global technology spending will beat expectations this year, investors are willing to pile back into a sector where many of the top companies trade for earnings multiples in the low double digits.
Apple (NAS: AAPL) , a company that just grew earnings by 118%, trades for a P/E of only 13.6. Oh, and it's up 17.7% on the year as well.
In the midst of all these technology companies with reasonable earnings multiples that are watching their share prices climb after strong earnings performances, you'd figure the market would have greeted Cisco's earnings today with open arms. After the bell, the company beat both revenue and earnings expectations last quarter while guiding ahead of expectations for next quarter as well. On top of all that, CEO John Chambers said he believed the company's forward estimates were "conservative."
However, despite the earnings beat and better-than-expected guidance, in after-hours trading Cisco's shares swung to a slight loss. That could be an anomaly. It could be that investors are keying in on some smaller data points in Cisco's earnings, such as sinking gross margins in the quarter ahead.
Or it could just be that big blue-chip companies like Cisco and Microsoft have risen by double-digit percentages in a very short time frame and more is now expected of them than the published "consensus" earnings estimates splashed all over earnings recaps. The "wow" factor of just beating earnings expectations that were watered down across last year is gone; CEO fretting over global macroeonomic worries is accepted less and less as an excuse for poor performance. Strong results are now anticipated.
Yet after an 18% gain for a company like Microsoft this year, you have to ask yourself, "Have earnings been that good?" After all, the company saw just 5% revenue growth, and sales of Windows fell by 6% from last year.
Cisco's earnings and the subsequent muted reaction both hint that tech's rise is due for a pause. The Dow has ridden the tech sector to its early 2012 gains, but if the market's not pleased with Cisco's results today, companies like Microsoft will find it much harder to please the market next time they step up to the plate with 5% revenue growth.
This is all to say that while 2012 has felt like 1999 for tech investors, I wouldn't get too comfortable with the situation. Tech's not due for a crash, but it won't be able to continue fueling the market's rise the way it has through the early part of the year.
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At the time this article was published Eric Bleeker owns shares of Cisco and EMC. The Motley Fool owns shares of EMC, IBM, Apple, Microsoft, Cisco Systems, and Intel.Motley Fool newsletter serviceshave recommended buying shares of Microsoft, Intel, Cisco Systems, and Apple and creating bull call spread positions in Microsoft and Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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