New York Market: Internet firms lead stocks higher

The internet and a select group of big, fast-growing companies spurred US stocks higher in the first quarter - and there's no sign the leadership will change at any point in the near future. For the first quarter, the S&P 500 Index returned 4.9 per cent. If it continues at that pace, it will end this year with a 22 per cent gain, giving an unprecedented fifth straight year of gains of 20 per cent or more. Investors who look far afield to capture those gains do so at their peril.

"For the moment, the game has not changed," said Marshall Front, director of Trees Front Associates. "We're going to see a continued migration of money to companies that are able to demonstrate superior growth."

Superior growth doesn't necessarily mean profits. Most of the internet companies earn little, or post outright losses. Still, investors look to the potential profits from the internet and the prospects for mergers in the industry.

Value stocks and small stocks will languish, said Mr Front. He owns Intel and recently added Medtronic to his holdings of the world's largest pacemaker company.

Last week, the Dow Jones Industrial Average added just 9.99 points after closing on Monday above 10,000 for the first time. The S&P's 500 rose 0.9 per cent and the Nasdaq jumped 3 per cent, easily its best showing since late January this year.

Analysts expect the companies in the S&P 500 to report 6.7 per cent growth in earnings for the quarter. Even better, the number of companies warning that earnings will be disappointing is well below the level of recent quarters.

Investors also will be able to act on two key economic reports, though all signs point to continued growth with low inflation. The Labor Department reports on the number of new jobs created in March and the unemployment rate for the month. Stock markets closed on Friday, though the bond market stayed open.

Investors expect more mergers like Yahoo's purchase of Broadcast.com to boost internet stocks in the coming months. One problem lurking in the online world is a potential slew of new stock sales as companies and their financial advisers rush to take advantage of the high valuations being accorded online companies.

"The investment bankers will flood the market with internet stocks and the bubble will collapse," said Robert Natale, manager for Bear Stearns Asset Management. "I give it three to six months." There are 211 initial public offerings in the pipeline, and 65 of those are internet companies.