A Record Quarter for Tech: Can the Rally Continue?

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The first quarter of 2012 is officially wrapped up, and it's one for the record books. The Nasdaq (INDEX: ^IXIC  ) closed up 19% on the quarter, its best result since 1991. That significantly outpaces the S&P 500, which saw a 12% jump.

Why's tech outperforming? Apple (Nasdaq: AAPL  ) is a key reason. The company is about 17.5% of the Nasdaq's weighting, and in spite of a drop below $600 per share on Friday, it still returned an astounding 48% return this quarter.

However, it's not all Apple driving the tech sphere. Four out of the five largest tech companies in the Nasdaq 100 outperformed the S&P 500. Microsoft (Nasdaq: MSFT  ) saw a 24% gain during the quarter, while Intel (Nasdaq: INTC  ) tacked on 16%. Only Google, which saw a 0.7% drop in its shares across the quarter, underperformed the broader market.

Is tech set to cool down? My crystal ball is out to the shop for repairs, but I will say there are some signs the rally is running out of steam. The P/E on the Nasdaq stands at about 21.8, which isn't close to what we saw during the "bubble," but it's also not cheap by any means.

The information technology sector posted the highest earnings growth of any sector last quarter. Tech earnings leapt 17.1%, a number more than double the S&P 500's 8.4% growth rate. With that kind of growth, a higher P/E for tech stocks could be justified. However, the main problem is that without Apple, tech-earnings growth falls all the way down to 4.8%! Simply put, aside from Apple, technology companies aren't exactly booming.

With the tech space outside Apple actually underperforming growth in other industries, the broadness of the tech rally is concerning. Unless other giants of technology, such as Oracle (Nasdaq: ORCL  ) and Microsoft, which saw sales growth slip below 5% last quarter, can show strong sales growth in the latter half of 2012, investors might be tempted to look at other value plays, such as big oil stocks trading between 5 and 7 times earnings.

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Eric Bleeker owns shares of no companies mentioned above. Make sure to follow his tech commentary on Twitter. The Motley Fool owns shares of Microsoft, Apple, Google, Intel, and Oracle. Motley Fool newsletter services have recommended buying shares of Intel, Microsoft, Google, and Apple and creating bull call spread positions in Microsoft and Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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