Market Perspective for April 24, 2015

The Nasdaq broke its all-time high on Thursday and strong earnings from tech giants pushed it further into record territory on Friday. Shares of Amazon (AMZN) were up 15 percent in early trading, a new all-time high, following its earnings report on Thursday evening. Although Amazon is still losing money, investors reacted positively to its report of rapid growth and high profitability in the web services division. The company is now transitioning from a retailer who used information technology to move physical goods such as books, to an information retailer that sells technology services.

One of the surprises in Amazon’s earnings report was that in contrast to the highly profitable web services, the retail division is much less profitable than believed. Amazon has invested a lot of capital to boost retail margins and while small increases could turn into big profits, it’s likely that web services will drive earnings in the future.

Shares of eBay (EBAY) also rallied following its earnings report, as did Microsoft (MSFT) and Juniper Networks (JNPR), all helping to propel the Nasdaq’s rise.

While investors generally rewarded companies who delivered good earnings reports, they also punished those who failed to meet high expectations. Biotechnology is one of the leading sectors in the market and investors have priced a lot of optimism into shares. This morning Biogen (BIIB) fell 6 percent after missing estimates, even though profits increased 71 percent in the first quarter. Even with the drop today, shares are still up 19 percent in 2015.

Other firms reporting strong earnings this week included Starbucks (SBUX), Dunkin Brands (DNKN), Domino’s Pizza (DPZ) and Verizon (VZ).

It was a light week for economic data. New homes sales in March were down from levels seen the prior two months, but still above the highest level seen in 2014. Durable goods orders were up 4 percent in March, although much of the rise was due to a jump in aircraft, which is volatile month-to-month.

While the Nasdaq is in record territory, the other indexes are still sitting near their all-time highs. The S&P 500 hit a new intraday high on Thursday. It, along with the Dow Jones Industrial Average and Russell 2000 Index, are likely to follow the Nasdaq because its move is a major technical breakout. The Dow Jones Industrial Average didn’t break its 1929 high until 1954, a full 25 years following the top. That bull market, which began in 1942, would not end until 1966.

Another 12 year rally in the Nasdaq seems unlikely given the post-war economy was a very different economic environment. Still, the breaking of old highs tends to lead to more highs and unlike in 2000, there isn’t a speculative bubble in share prices. The companies that dominate the Nasdaq today trade at reasonable price-to-earnings ratios relative to the rest of the stock market, with a few large cap exceptions such as Amazon (AMZN).

Many of the companies that helped pushed the Nasdaq to 5000 in the year 2000 are still around and trading at new all-time highs. Several of the tech giants paying dividends, with yields that are 50 percent higher than the S&P 500 Index (such as Microsoft, Cisco and Qualcomm). One major reason for the index’s rise these past 15 years is Apple (AAPL), a firm that remade itself in the 2000s. However, while Apple makes the list of the top 10 largest gainers since March 2000 with its 2,785% gain, that return is eclipsed by three non-technology companies: Monster Beverage gained 52,000%, Keurig Green Mountain climbed 28,000% and Tractor Supply advanced 8,100%.

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