Overlooking news that Microsoft ( MSFT) delayed the launch of the Windows Vista operating system, major averages rallied Wednesday as gasoline prices and Treasury yields fell.

Stocks seemed to take their cues from the bond market, which downplayed recent fears of inflation and of more rate hikes by the Federal Reserve. The benchmark 10-year Treasury bond rose in price while its yield, which moves inversely, dropped to 4.70%.

The Dow Jones Industrial Average rose 81 points, or 0.7%, to 11,317, closing above 11,300 for the first time since May 2001.

Blue chips benefited from strength in General Motors ( GM) after Delphi, its main parts supplier, reached a deal with the United Auto Workers union. JP Morgan Chase ( JPM) and Citigroup ( C) also advanced nicely after financial peer Morgan Stanley ( MS) posted strong earnings.

The S&P 500 advanced 0.6% to 1305.

The Nasdaq Composite, meanwhile, overcame early weakness to bounce solidly higher. After falling to a morning low of 2282, the tech-heavy index finished the session at 2303 points, or 0.4% higher.

While Microsoft dropped 2.1%, tech investors moved into the shares of rival Apple ( AAPL), whose line of computers run on an operating system that's separate from Windows.

Other PC makers -- which might see a drop in their end-of-year computer sales due to the Vista delay, were mixed. Gateway ( GTW) dropped 3% but IBM ( IBM) and Dell ( DELL) finished higher.

"We should have seen a corrective behavior today but we've got a lot of fast money, hedge fund money, that keeps on coming from the sidelines," says Barry Hyman, market strategist at Ehrankrantz King Nussbaum. "When one sector underperforms, it just goes to the next sector."

Yet, Hyman doesn't downplay the potential impact of the Vista delay on the market, which is likely to reverberate far beyond Microsoft's bottom line.

"I don't discount the news," he says. "This will affect the second-half earnings estimates of tech companies and cut the business spending cycle as everything else gets delayed."

Many bullish strategists have partly based their optimistic forecasts for economic and profit growth in 2006 on a capital spending boom, itself largely driven by corporate needs to upgrade obsolete technology.

Microsoft delayed the launch of the consumer version of Vista until January 2007 but will release a business version in November of this year. Still, that's fairly late in the game for capital spending this year.

According to Morningstar analyst Toan Tran, corporations are always slower than consumers to adopt new operating systems as information technology managers tend to wait for all the bugs to be fixed before placing their order. "Either way, we couldn't really expect Vista's adoption by firms this year," he says.

What does this mean in terms of delayed capital spending? Tran estimates that Microsoft cashed in $12.2 billion in revenue from its Windows business in 2005. About 75%, or $9.15 billion, came from business customers. Revenue from Windows tends to jump 15% to 20% upon the launch of a new operating system, as in 2001, when Microsoft released Windows XP.

All in all, that's roughly $11 billion of delayed corporate revenue just for Microsoft this year. Add to this the delayed revenue from all the software and chipmaking firms depending on the Vista launch and there's probably roughly twice that amount, or $20 billion, that won't be fueling the economy this year, according to Ethan Harris, chief economist at Lehman Brothers.

That's not much compared with the $1.3 trillion in business spending for all of 2005, but it's about 18% of the $110 billion increase in spending that Harris was expecting for 2006.

Still, business spending remains on a strong uptrend since turning around in 2004, following years of underinvestment by firms after the excesses of the dot-com era.

"This story is much more important for stocks than it is for the economy," Harris says. "It's certainly quite important for earnings."

According to Citigroup strategist Tobias Levkovich, sales of Windows Vista weren't likely to take off this year anyway.

But the strategist believed the stock market would anticipate a big corporate upgrade cycle by pushing up traditional tech names such as Microsoft, IBM and Intel ( INTC), at the expense of Internet names like Google ( GOOG) and eBay ( EBAY).

Equity analysts have also penciled in earning gains linked to the Vista upgrade for many PC and software makers for the second half of 2006.

According to Hyman, a part of Vista's delayed launch might already have been priced in, as the market was worrying about such an event. It's not, after all, the first time that Microsoft delays the launch of an operating system.

Indeed, tech stocks on the Nasdaq have been underperforming, falling 0.9% in March through Tuesday's close. Industrial stocks on the Dow, meanwhile, advanced 2.2% in that same period.

That might help explain why the stock market weathered news of the Vista delay so well on Wednesday. Then again, it could be that less-impressive capital spending this year plays into the hands of bullish hopes that the Fed will soon stop raising rates.
In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback; click here to send him an email.

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