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Technology companies beat retreat

Jul 6, 2000

The NASDAQ is looking as vulnerable as ever. After concerns regarding inflation, large-scale margin purchases and increasing losses of new economy companies, the software companies have created a scare. While investing in stocks (or for that matter in a stock market as a whole) earnings growth is given a high weightage, and that for several reasons. To put it broadly, earnings growth reflects the level buoyancy in an economy. This is so because the growth in bottomline captures both how realisations and costs are moving. In case inflation is rising one would expect that over the long term firms could witness erosion in margins (unless ofcourse they can pass the entire hike to customers). A decline in realisations meanwhile could result from higher competition (which could lead to competitive pricing) or simply a slowdown in demand for products.

A couple of high profile companies including Computer Associates issued statements that they may miss their quarter earning targets. In case of Computer Associates the result was 43% erosion in market capitalization. On the whole, the announcements took their toll on the DOW and NASDAQ indices, with both declining 0.7% and 3.2% respectively.

Indian software companies too hit the earnings season next week. It will be interesting to note whether Infosys and Satyam (the flag bearers) are able to meet with the ever-increasing expectations of investors. If they do, the markets would heave a sigh of relief. Else, expect another sell off (hopefully not as bad as the one experienced by Computer Associates).

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