Thank heaven for Microsoft and IBM. Who knows what might have happened if they hadn't reported blow-out earnings.
Even though the world's biggest software and hardware companies reported better-than-expected results, US stocks were mixed for much of the day Wednesday. Investors combed through a slew of earnings reports released Tuesday and noticed that sales growth rates have slowed considerably. Since expectations of future growth is the underpinning of stock prices, most stocks were lower for much of the day before rallying near the closing bell.
It seems concerns about the world's economy and its affect on US companies are still very much on the minds of investors, even in light of astounding results from Microsoft and IBM.
"I think the market is very nervous," said James Volk, co-director of institutional trading at D.A. Davidson & Co. "We have had a 1,100-point rally without any kind of correction. Right now the market is easing back here which is kind of healthy."
The Wired Index rose 2.10 to 377.86 and the Dow Jones Industrial Average gained 13.38 to 8519.23. Earlier in the day, though, the Dow was off as much as 59.73 points.
After the market closed on Tuesday, both IBM and Microsoft reported earnings that were better than what Wall Street expected. IBM attributed the results to robust growth across all its businesses, particularly its services unit, which sets up and runs computer networks for big companies. Microsoft's results beat what even the most optimistic analysts had forecast, on the strength of Windows 98 and Windows NT sales. This quarter, Microsoft passed IBM to become the biggest software company in terms of revenue, and at its current pace, the software king will be the most profitable company on the planet next year.
Microsoft (MSFT) rose US$6.06, or 6.1 percent, to $106.31, while IBM (IBM) advanced $4.81 to $142.69.
IBM and Microsoft's results indicated that demand for computers and software remains strong, even as companies and consumers are cutting back spending on other products to hunker down for possible tough economic times.
Most PC stocks advanced in sympathy. Compaq Computer (CPQ) inched up 63 cents to $28.38, Dell Computer (DELL) rose $3.63 to $56.94, and Apple Computer (AAPL) gained $1.06 to $37.13.
But elsewhere in corporate America, investors found disconcerting signs. PeopleSoft, for example, matched earnings forecast on Tuesday with its third-quarter results. Its stock was hammered Wednesday, however, because its software licensing growth rate slowed to a mere 30 percent in the quarter, compared with the 70 or 80 percent clip the software company has had in recent years.
"It's clearly worse than what people were thinking," Chuck Philips, an analyst for Morgan Stanley Dean Witter, said Tuesday. "PeopleSoft's licensing fee growth rate fell from 53 percent [last quarter] to 30 percent, a drop of 43 percent in growth rate. That's not going to make anybody happy."
Indeed. PeopleSoft (PSFT) shares plunged $6, or 23 percent, to $19.75, the lowest price since April 1997. At least four investment banks lowered their investment rating on the stock, which was a Wall Street darling just two months ago.
Same story with oil companies. Exxon, Occidental Petroleum, and Amoco reported profits mostly in line with the Wall Street consensus, but their shares fell on prospects that crude oil prices will continue to fall in coming months. Exxon (XON) lost $1 to $75.56, Occidental (OXY) fell 63 cents to $20.19, and Amoco (AN) dropped 56 cents to $52.19.
AMR, parent company of American Airlines, also saw its stock decline, even though it reported better-than-expected third-quarter profit. The reason for the decline? The No. 2 air carrier said it sees international traffic "softening" even more in 1999 amid the international economic crisis. AMR (OXY) lost 6 cents to $57.88.
One word: plastics! Rubbermaid (RBD) was one of the most active US stocks Wednesday after it agreed to be acquired for $5.8 billion by Newell. Its shares surged $6.13, or 24 percent, to $32. With Rubbermaid, Newell will be one of the biggest houseware companies with brands like Tupperware, Little Tikes toys, Ace Combs, and Rolodex.
EMC, a data-storage systems maker, continued to surge for a second day. On Tuesday, the company said its net income rose 52 percent on strong demand for large-scale computer systems. So far this year, EMC's (EMC) stock has doubled. On Wednesday it rose $2.88 to $61.69.
Telecom stocks also performed well after several Baby Bells reported strong revenue increases on demand for data services, caller ID, call waiting and other doodads. Bell Atlantic (BEL), the largest US regional phone company, rose 69 cents to $50.06 while US West (USW) gained 44 cents to $56.50. Globalstar Telecommunications (GSTRF) rose 25 cents to $12.69.
The Nasdaq was up 35.30 to 1674.49 and the S&P 500 rose 5.99 to 1069.92.
Financial columnist David Lazarus is taking the day off. Reuters contributed to this report.
