Spurred by a Federal Reserve plan to buy bonds, U.S. exchanges hit their highest point since 2008 Thursday, with technology vendors riding especially high in the wake of strong third-quarter earnings.
The tech-heavy Nasdaq closed Thursday at 2577, up by 37 points, beating its prior high for the year, set in April, and hitting a level not seen since January 2008. Computer stocks were on average up by more than 13 percent for the year.
The broader-based Dow Jones industrial average rose 219 points to close at 11,434, also a high for the year, and recovered the level it had reached right before the collapse of Lehman Brothers in September 2008. The failure of Lehman was followed in October 2008 by a stock market crash that sent exchanges down to levels of a decade earlier.
The immediate reason for the Thursday gain was the Fed announcement Wednesday of a planned US$600 billion spending spree on bonds, intended to inject more capital into the economy and ultimately increase employment. But the tech sector has done its part lately to encourage confidence in the economy.
For most of the third quarter, tech stocks slumped as fears of a double-dip recession weighed on investor confidence. But the IT sector started to lead markets after the U.S. Labor Day holiday at the beginning of September. The Nasdaq, home to many of the biggest names in IT, made the biggest jump of all, gaining almost 12 percent during the month. The broader-based Dow rose 777 points, or 7.7 percent, its biggest gain for the month of September in 70 years.
Since Labor Day, IT vendors have reported strong earnings. Apple and Intel, for example, reported record revenue and profit, while Microsoft announced it had generated more sales than it ever had for its first fiscal quarter. Other bellwethers like IBM, Intel, Google and Oracle also reported strong results that for the most part beat expectations. Enterprise spending, especially on software, has been especially strong lately.
There are clouds on the horizon, however. The components sector, closely tied to the fate of hardware including PCs and mobile devices, experienced strong sales this quarter, but recent earnings reports suggest that growth is slowing. This week, a string of reports from chipmakers reinforced analyst forecasts indicating that the post-recession sales cycle is over, and that year-on-year growth will return to single-digit levels.
Semiconductor International Manufacturing (SMIC), China's biggest contract chip manufacturer, reported its first operating profit in four years Wednesday, but also said revenue this quarter would be flat compared to the third quarter. SMIC reported a third-quarter profit of $30.7 million, compared to a $68.1 million loss a year earlier. Revenue was up by 26.8 percent to $410.1 million year on year, but up only 7.6 percent from the prior quarter.
Chip manufacturer On Semiconductor Wednesday posted record quarterly revenue, but also forecast weakening sales for the current quarter. For the third quarter, the company generated profit of $87.8 million, compared with $78.7 million a year earlier, but revenue rose only 3 percent to $600.7 million.
Orders appear to be slowing down and selling prices are going flat.
"Backlog levels at the beginning of the fourth quarter of 2010 were down slightly from backlog levels at the beginning of the third quarter of 2010," said On CEO Keith Jackson in a statement. "We expect that average selling prices for the fourth quarter of 2010 will be approximately flat when compared to the third quarter of 2010."
On Tuesday Dutch chipmaker NXP Semiconductors said quarterly revenue was $1.2 billion, an increase of 12.6 percent from a year ago but a 1.0 percent rise from the prior quarter. Operating income was $130 million, compared to a loss of $129 million a year earlier.
Market watchers are likely to pay great attention to sales growth over the next few months. While profit can be enhanced by trimming costs, businesses cannot cut their way to growth. Ultimately business can grow only if sales increase.
By this measure telecom equipment maker Alcatel-Lucent had a positive announcement Thursday, reporting that net profit during the third quarter was €25 million (US$35.3 million), compared to a loss of €182 million during the same period last year, while revenue increased to €4.07 billion, up 10.5 percent year over year and up 6.8 percent compared to the second quarter. Rising data traffic from mobile phones helped boost results, the company said.
Smartphones should provide one area of growth for chipmakers. According to an IDC report issued Thursday, vendors shipped a total of 81.1 million smartphones in the third quarter, up 89.5 percent from the 42.8 million units shipped during the year-earlier quarter.
"Smartphone makers have the wind behind their sails," said Kevin Restivo, a senior analyst at IDC, in a statement. "The market transition to smartphones is proceeding at a brisk and unabated pace."