Why Tech Stocks Soared Today

Tech, in general, was hopping today. The Nasdaq had its biggest day of the year, but some companies were really big winners. Let’s take a look at why tech stocks -- and big IT ones, in general -- saw such huge gains. 

Thank Europe

The news moving the markets today was unexpected progress in the eurozone. Essentially, a central bank supervisor is being created, which will provide relief to countries like Spain and Italy. That’s not a silver bullet to fix the eurozone, but it does point the continent in the right direction of stemming spiraling interest rates in weaker countries that threatened to break the euro currency apart.

That’s great news for EMC and other big tech plays. The reasoning is simple: Uncertainty from the situation has been causing companies to pull back on expenses and larger capital outlays. When it comes to IT, that means larger projects and upgrades can be cancelled or delayed. We saw this situation play out last summer during the debt standoff in the United States. As earnings season took hold in July, company after company issued cautious outlooks ahead.

With many tech companies already predicting slower growth in 2012, euro instability threatened to hit budgets that would affect companies with expensive IT equipment in an outsized way.

The effect was obvious on some of ITs largest players today -- they all soared.

Big IT companies taking off today

Company Today’s Gain
VMware 8.3%
EMC (NYSE: EMC  ) 8.1%
F5 Networks 6.6%
Oracle (Nasdaq: ORCL  ) 5.4%
Cisco (Nasdaq: CSCO  ) 4.2%

Source: S&P CapitalIQ

However, it’s worth keeping in mind that many of these stocks have been harshly battered during the past three months. Today’s rally stems some of the losses, but most of these stocks had dismal second quarters.

But… Still an awful second quarter

Company Performance in the second quarter
F5 Networks -26.2%
VMware -19.1%
Cisco -18.4%
EMC -13.3%
S&P 500 (For benchmark comparison) -2.9%
Oracle 1.4%

Source: S&P CapitalIQ

Even after today’s jump, most of these companies are still priced for trouble ahead.

What to watch for in the second half

As we enter the second half of the year, the see-saw of optimism and negativity in Europe will continue driving large price swings in the space. A second area to watch is China. Today, Nike warned of slowing growth in China, which mirrors other data showing that the country’s growth is slowing.

Nike has little in common with these big tech companies as far as its business is concerned  but, nonetheless, its warnings of slowing growth in China today could hint toward trouble in a market where many tech firms have been seeing outsized growth. While big IT companies don’t have nearly the China exposure of a consumer play, like Apple (Nasdaq: AAPL  ) , a slowdown in the country could hurt them. Other tech names to watch would be IBM, which has been seeing double-digit growth in "growth markets"  like China and, also, Intel, which has been crediting China and other emerging markets for surprising growth in its PC processor unit during the past year.

If you own companies that have seen China-fueled growth, earnings reports across July and August will shed quite a bit of light on whether that growth will continue across the coming year.

Finding better ideas

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Eric Bleeker owns shares of EMC and Cisco. The Motley Fool owns shares of EMC, Cisco Systems, Intel, International Business Machines, and Oracle. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple, F5 Networks, VMware, Nike, and Intel. Motley Fool newsletter services have recommended creating a synthetic long position in International Business Machines. Motley Fool newsletter services have recommended creating a diagonal call position in Nike. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On June 29, 2012, at 7:49 PM, dunce1239 wrote:

    The problems in Europe were not caused by banks, they were caused by corrupt lying governments beginning with Greece. Another bureaucratic layer of market interference is only going to make things worse.

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