Investors betting on the tech sector to lead a new bull market as it did in the late 1990s were likely disappointed this past week when the NASDAQ composite tumbled on tepid outlooks from Nokia and IBM.
Analysts say the setback isn't necessarily surprising, noting that a fresh bull run is rarely led by a previous driver. Indeed, they believe a clear leader might not emerge for some time, although financial services and cross-industry categories such as dividend-paying stocks show promise.
"The `leadership factor' is frequently associated with major bull markets," Mark Fulton, deputy director of US equity research for Smith Barney, said in a report Thursday. "The renewed equity rally to date has included a substantial technology recovery, but this is more in line with a [short-term] cyclical recovery than structural leadership."
Fulton and equity strategist Tobias Levkovich explained that while some segments of the tech sector have performed strongly, it is unclear whether the gains are sustainable or that Wall Street's advance overall can continue long-term.
"There has been fairly constant sector rotation in the equity market, with no clear leadership over the past three years," Levkovich stated. "In a cyclical recovery, certain industries will do better than others ... while a softening economy may demand that investors seek out more-defensive stocks."
There was evidence of a leadership void this past week.
After far outpacing the other major indexes this year, the NASDAQ suffered its largest point-drop in four months Thursday on weak forecasts from Nokia and IBM. Analysts said investors were disappointed after having high expectations for a second-half economic recovery, particularly in the tech sector, although Microsoft helped alleviate some of those concerns with an upbeat outlook late Thursday.
The financial services sector, meanwhile, showed surprising strength after Citigroup, Bank of America and Merrill Lynch reported quarterly earnings that handily beat analysts' estimates. The results helped minimize losses in the Dow Jones industrial average this past week.
Analysts believe the technology, financial services and health care sectors in particular have the potential to be market drivers since they make up a large portion of the Standard & Poor's 500 index. But each also has its vulnerabilities, they said.
Banks, for example, could suffer in coming quarters with the threat of rising interest rates, which would dampen their thriving mortgage-lending businesses.
Technology is showing growth that is quite modest compared to the "new economy" Internet story of the late 1990s. Smith Barney analysts, meanwhile, believe the health care sector may be overvalued because of proposed legislation limiting prescription drug costs.
More likely, it will be a few individual companies in those three sectors and others that will stand out, analysts said. For example, Microsoft and Intel in technology, Amgen in biotechnology, American Express in financials, and General Electric and Caterpillar in industrials might prove to be the leaders rather than the sectors themselves, Levkovich said.
"There are probably certain segments of technology that can well be market leaders ... Internet companies such as eBay and Yahoo, whose businesses appear strong," said Robert Streed, portfolio manager of Northern Trust Select Equity Fund.