Is tech poised to turn the market up?

Author:
Publish date:
Updated on

Among all the doom and gloom over earnings of banks to automakers, to soft drinks producers, technology may just save the day this quarter:

IT Cuts Won't Rival Dot-Com Bust - Gartner


October 10 has served as the end of two bear markets (one in 1990, and one in 2002), and Monday snap gains in the Dow after big selloffs have served as turnarounds in market performance twice (once in 1933, and again in 1987). There's a reason for this: those gains happened to coincide with earnings announcements.
When companies beat earnings expectations, that's usually enough to inspire the last, most fundamental stage of the market growth curve to reappear: long-term investors.
In all the mayhem last week, it was easy to miss IBM's "surprise" announcement that it increased earnings by 22% over the previous year. That's no mean feat at any time; right now it's nothing short of spectacular. Typically, analysts began scratching their heads.
Technology companies are not recession proof per se, but their business models are built with defenses against what we consider to be traditional recession-time activity. That's because of two reasons. One is that tech titans learned from the vulnerabilities of their industrial predecessors when designing their organizations.
Most importantly however, it's because the very components of traditional businesses they disrupt are the ones vulnerable to recession. Think of it like this: in a 1980's recession, music sales were often some of the first to spiral (people can go without the extra Madonna hit when they've been laid off and they're broke). That's because of the way quick-revenue products were sold, as a $3 single (usually with one additional track produced on the cheap), earning music companies wads of cash on excessive margins. But now think about the MP3 model: the downloadable, bare-boned, stripped away single on its own for just 99 cents. That's not something people necessarily feel the need to cut back on.
Moreover, outsourcing firms and many tech products are specifically built as cost-savers: it's odd to think of companies cutting back on their cheapest resources when they're strapped for cash.
Software was a major reason for the rapid advancement of the economy out of recession in the 1990's. Of course that's not to say that all tech companies are going to outperform, but a substantial number may do.
Mauled along with everyone else in the recent selloff, companies such as Apple, Cisco, and Intel may just end up bucking the trend this earnings season, and bringing the market up with it a little bit. And that's exactly what they were designed to do.

Related