Technology stocks captured Wall Street's attention this week, propelling the Nasdaq composite into record territory. Now investors will find out if their hunch was correct when the Federal Reserve Board's policy meeting convenes Tuesday.
Thanks to some better-than-expected employment and economic reports, most traders are betting the Fed will leave short-term interest rates unchanged this week. What was considered a virtual certainty two months ago has now become outside possibility.
For the week, the Dow Jones industrial average closed up 65 points to 10,769.01 while the Nasdaq composite rallied up 118 points to an all-time high of 3,220.86.
October payroll data helped assuage investor worries about inflation and subsequent interest-rate hikes. According to the U.S. Bureau of Labor Statistics, October non-farm payrolls grew 310,000, a level below market expectations.
Average hourly earnings showed a rise of 0.1 percent to $13.37 from September's $13.36.
"The numbers helped people to feel confident that there will be only a little rate change or no rate change," said Ron Doran, director of institutional trading at C.L. King & Associates.
This week, the October Producer Price Index, which measures inflation at the wholesale level, fell 0.1 percent but a slight rise in the core rate sparked worries of an interest-rate increase. The core rate, which excludes volatile food and energy prices rose 0.3 percent, reflecting an increase in car prices, according to the report released by the Labor Department.
With tech stocks trading at such high valuations, the process of predicting what the Fed may or may not do has become akin to reading Rorschach inkblots.
"I think that's been a conditioning factor in both the up and down volume in the last week or two," William Cheney, the chief economist for John Hancock Funds, said of the Fed meeting.
This week, a couple of key tech bellwethers delivered solid earnings as both Cisco Systems Inc. (Nasdaq: CSCO) and Dell Computer Corp. (Nasdaq: DELL) checked in with solid sales growth in their most recent quarter.
In its first quarter, Cisco slipped past analysts' estimates, earning $837 million, or 24 cents a share, on sales of $3.88 billion.
Dell earned $483 million, or 18 cents a share, on sales of $6.78 billion, meeting analysts' reduced estimates following its profit warning earlier in the quarter.
Looking ahead to next week, two more giants from the semiconductor and PC industries will report earnings.
Hewlett-Packard Co. (NYSE: HWP), which warned that it would likely miss the Street estimate in its fourth quarter, is expected to earn 73 cents a share.
The chip and PC maker said its UNIX workstation business was struggling and corporate PC sales were lagging.
Earlier in the quarter, CEO Carly Fiorina had said H-P had "a decent shot" at meeting the First Call consensus estimate of 98 cents a share in the fourth quarter. She added, however, that it expected total sales growth to be at the low end of the 10 percent to 13 percent range projected by analysts.
Since then, however, the company has been unable to make up for the North American sales shortfall through cost cutting and upside in other business areas, as it had hoped.
Company officials also said last month's earthquake in Taiwan had disrupted PC production and limited the potential for upside in that business. H-P said that PCs were not a problem area but because of the earthquake, that division would not deliver any positive surprises.
Applied Materials Inc. (Nasdaq: AMAT) is having no such problems.
First Call consensus expects it to earn 64 cents a share in its fourth quarter, a huge improvement from the 7 cents a share it earned in the year-ago quarter.
Last quarter, the semiconductor-equipment maker raked in $244 million, or 61 cents a share, on sales of $1.43 billion. Analysts had expected a profit of 53 cents.
With its shares hovering above $105 a share, the company's come along way in the past year. At this time last year, its stock was trading at $35 a share.