On a day reminiscent of ebullient sessions during the technology boom, investors snatched up stocks on Wall Street and the Nasdaq yesterday, with both indices recording the biggest one-day gains this year. The trigger was better-than-expected results from Cisco Systems.
The networking giant said it expected little growth in the coming quarter. It also warned that it did not see a quick recovery from the slowdown in spending by its important telecommunications customers.
But the fact that the company was able to say it had turned around from a steep loss the year before was enough to dispel the pessimism over profits that has dragged down the main indices in recent weeks.
"We're not calling a turnaround, but we are seeing some early indications that are of interest to us," said Mr John Chambers, Cisco president and chief executive. Late on Tuesday, Cisco said it earned $729 million (€803 million), or 10 US cents a share, for the three months to April 27th.
The broad market rally was helped also by earnings reaffirmations from General Electric and Eastman Kodak. Networking and fiber-optic companies along with microchip and hardware stocks did particularly well.
The selling stalled towards the end of the day but not before the Dow soared 300 points. At the height of the frenzy, the Nasdaq Composite ran up 97 points, or 6.2 per cent, to 1,671 and the Nasdaq 100 Index climbed 99 points higher, or 8.6 per cent, to 1,259. Intel, General Electric, IBM, Microsoft and Hewlett-Packard all made big gains. Cisco soared $2.63, or 20 per cent, to $15.71.
European investors took their cue from Wall Street, with the FTSE 100 index adding 1.74 per cent to 5,209.1 points, the Frankfurt DAX 30 index charging 3.21 per cent to 5,028.59 points and the Paris CAC 40 rallying 2.5 per cent to 4,404.02 points. Across the 12-nation euro zone, the Euro Stoxx 50 index firmed 2.52 per cent to 3,540.25 points. In Dublin, the ISEQ rose 39.28 points or 0.76 per cent to 5,199.95.
Traders anxious not to miss the recovery boat snapped up stocks. The main gainers in Europe were those stocks that fell hardest earlier in the week, notably technology, telecoms and media issues.
Underpinning the bullish mood was the Federal Reserve decision on Tuesday not to raise rates from their 40-year low - and more importantly its heavy hint that they would stay that way well into the summer. Analysts predict that because of its preoccupation with the slump in business spending, the Fed will delay until its August 13th policy committee meeting any decision to lift rates off the floor.
The spectacular rally came after weeks of poor earnings reports and a crisis of confidence in the market brought on by accountancy and brokerage scandals.
Although the mood was decisively positive, traders remained cautious about the underlying strength. They noted that the Nasdaq Composite was bound to regain some momentum after falling below 1,700 in late April.
"Cisco restored some confidence in the markets, but we've been so drastically oversold," said Mr Peter Coolidge, senior equity trader at Brean Murray & Co.
The key will be how much follow-through buying there will be in coming sessions, and after Tuesday's strong US productivity numbers, next week's US industrial production data will be closely watched for more signs of economic upturn to lift profits, said Mr Michael O'Sullivan, European strategist at Commerzbank.
Fund managers were equally wary about calling a turn in the market. "It's still too early to call an earnings recovery," said Mr Richard Champion, a European fund manager at Pavilion Asset Management in London. "The downtrend remains in place," he added.
