Earnings Test Awaits Rally in Tech Stocks

By MARK GONGLOFF as of 04 20 2008 This U.S. market rally has been led by the darlings of a decade ago: technology stocks. Their leadership will be tested this week, with a burst of big-name tech earnings, including International Business Machines and Texas Instruments on Monday, Yahoo on Tuesday, Apple on Wednesday, and Amazon.com and Microsoft on Thursday. Except for Microsoft, each of these stocks is up at least 16% on the year. During the same period, the tech-heavy Nasdaq Composite Index has outpaced other market barometers, with its 6% rise trouncing the Dow Jones Industrial Average, down 7%. The tech rally could be a good omen for the broader market, suggesting investors are getting hungrier for riskier assets. According to a Banc of America Securities-Merrill Lynch survey released last week, technology is the most-loved sector among global fund managers, with 27% professing to be "overweight" tech stocks -- jargon for backing up the truck for a heaping helping. Nevertheless, fund managers are hedging their tech bets. The survey showed that the second-favorite sector is pharmaceuticals, traditionally a defensive play. Still at the bottom of fund managers' shopping lists: banking, the rotten root of the financial crisis. Investors want risk, but only so much, suggests BAS-ML strategist Michael Hartnett, and tech companies have filled that niche. They typically have clean balance sheets, meaning investors don't have to lie awake nights worrying about toxic assets. Technology also has little connection to energy and materials, which were last year's darlings but collapsed under the weight of global recession and are still seen as expensive, according to the survey. In another sign of defensiveness, the biggest tech names have outshined the rest. The Nasdaq 100 index of its biggest stocks by market capitalization is up about 12% this year, tugged higher by goliaths Google and Apple, up 28% and 45%, respectively. The index would be even higher if not for Microsoft's 1% decline. Microsoft has suffered because its January earnings report missed expectations and it declined to offer guidance for the rest of the year. Last week, analysts cut estimates for its fiscal third quarter, ended in March, after reports from Gartner and IDC that global personal-computer shipments fell 6.5% to 7% in the first quarter from a year earlier. Analysts raised their forecasts for Apple's quarter despite the same reports, mainly because Apple's numbers weren't as horrible as expected. Like Google, Apple has a record of blowing earnings expectations out of the water with eye-poppingly good reports. Google held up its end last week, and the market needs Apple to deliver, too. Tech is still vulnerable to what will likely be a new trend of hesitant spending by consumers still burdened with debt, lost wealth and increasing unemployment. The gap between haves and have-nots could keep growing, keeping the Googles and Apples of the world afloat, but wreaking havoc in tech's lower ranks. Email to tape@wsj.com