The contrast between the US’s resurgent “old economy” industries and its troubled technology sector came to the fore on Friday when heavy machinery maker Caterpillar reported its best-yet quarterly earnings while personal computer maker Dell capped a bad week for technology companies with a profit warning.
The divergent fortunes of two of corporate America’s most important sectors, coupled with concerns about a slowing domestic economy and tensions in the Middle East, are fuelling investor uncertainty over the direction of the stock market.
All the main US share indices were down as the woes of the technology sector, with the exception of Microsoft and Google, outweighed the good news from US manufacturers with exposure to booming markets such as mining and energy.
Industry experts say that some of the US’s traditional industries, aside from the ailing automotive and airline sectors, are outpacing the “new economy”, thanks to a weaker dollar, high commodity prices and a wave of consolidation and cost-cutting that has weeded out weaker players.
The prediction by Caterpillar, the world’s biggest maker of earth-moving equipment, that it is on course to record its highest annual profits and revenues in 40 years follows upbeat pronouncements by other global manufacturers such as General Electric and Honeywell.
“We had a spectacular second quarter [and] we don’t see 2006 as the peak,” said Jim Owens, Caterpillar’s chairman and chief executive, after announcing a 40 per cent increase in pre-tax profit to $1.5bn in the three months to June 30.
The good performance, in spite of higher operating costs, prompted Caterpillar, which is seen as a bellwether for blue-chip manufacturing stocks, to lift its outlook for earnings and sales for the whole of this year. By contrast, sectors such as personal computers are resembling old maturing industries.
Growth is slowing and companies have become involved in cut-throat price competition to try to increase their market share.
Shares in Dell, the world’s biggest maker of PCs, fell to a five-year low during morning trading after warning that profits would not meet expectations because of heavy discounting in a softening market for PCs.
Earlier this week Intel, the chipmaker, admitted that revenues would not meet its forecasts this year and were likely to be 10 per cent down after three years of double-digit growth.
Shares in its rival AMD were down 10 per cent on Friday after its second-quarter sales suffered from the chip price war with Intel and slowing demand for PCs, while the search engine Yahoo disappointed Wall Street by losing further ground to Google.