Perhaps the most remarkable statistic about the current stock market is that the Nasdaq 100--the index comprising some of the largest big-name technology companies in the United States--is still up 20 percent for the year. While other indices have been decimated, the bellwether tech stocks – Intel, Cisco, Dell, and Microsoft – have continued to remain investor favorites, and have continued to reward investors.
With the notable exception of Intel, the performance of these companies' stocks has been, if not justified, then at least understandable, because they have continued to deliver excellent results even in the face of a global economic slowdown. Dell, in particular, has been unparalleled in its ability to wring greater and greater profits out of the PC business, while Microsoft has reaped all the expected benefits from its monopoly over--I mean, its extremely large share of--the operating-system market and Cisco has maintained its usual steady-as-she-goes practice of turning in quarterly earnings a penny or so ahead of analysts' estimates.
In the last week, though, the Nasdaq 100 in particular and the entire Nasdaq in general have taken it on the chin, dropping precipitously last Wednesday and Thursday, limping into positive territory on Friday, and then plummeting sharply today, with the Nasdaq down almost 90 points at midday. It's more than possible that by the time you read this, the Nasdaq will have recouped all or much of its lost ground (what are insanely volatile markets for, if not to embarrass writers who file stories before the end of the day), but it's obvious nonetheless that investors no longer believe that owning tech stocks is the solution to all sins.
Unlike other sell-offs, though, it would be a mistake to chalk this one up to simple panic, or a bursting bubble. Instead, we're beginning to see concrete evidence of the way in which turmoil abroad and a slowing economy at home are chewing into corporate earnings. Database software company Oracle, for instance, announced in a federal filing on Friday that "pricing pressures" were likely to cause it to fall short of analysts' expectations for the current quarter. Oracle has watched its business slow considerably in the past two years, and has already been hard-hit by Asia. But this latest news demonstrates the degree to which even industry leaders have become subject to fierce pricing competition, and is a small bit of evidence to add to the thesis that deflation is a real threat to corporate earnings, particularly for those companies that do a lot of business abroad.
At the same time, Cisco's stock was downgraded by a brokerage house, which also lowered its earnings estimates. The difference between the new and old estimates by SG Cowen is so small (two cents) as to be ludicrous, and would hardly be enough to send the stock plummeting by 15 percent, were it not for the fact that the Cowen report laid out a persuasive case that U.S. corporations will cut back on their information-technology spending in 1999.
Why is this important? Well, much of the so-called "New Economy" thesis has been predicated on the idea that advances in IT are ushering in a new wave of productivity. And much of the rationale for the stratospheric price-to-earnings ratios of companies like Cisco has been predicated on the idea that companies would not stop spending on information technology as business slowed. What we may be seeing instead is that capital spending on IT is like capital spending on anything else: Companies are less likely to approve it when they feel wary about the future. If that's the case, then the valuations of a whole series of networking and database companies are still way out of whack with the rest of the market. When you price two years' of good news into a stock, even the hint of bad news can be enough to send it tumbling.