Downturn? What Downturn?

The economy may still be pointed downward, but you wouldn't necessarily notice that in parsing this week's technology-earnings reports. Stocks rallied through most of this week as investors welcomed a stronger dollar, weaker oil prices and upbeat earnings from the tech center, including trendsetters like Apple, Yahoo, and Microsoft.

Apple led the charge, exceeding its own forecast with a quarterly profit jump of 36 percent, as revenue climbed to $7.5 billion and net income $1.1 billion for its second fiscal quarter. The boost didn't come from iPod or iPhone sales as one might expect. Instead, it was the strength of Mac computers that provided the lift. Mac shipments were up 51 percent over last year to 2.29 million units.

"Apple is clearly building products that are resonating with customers in a big way," says Michael Gartenberg, who leads Jupiter Research's team on emerging technology platforms. "It's a combination of the strong brand that Apple's been able to develop through the iPod, and their stores, which are great showcases for products--you go in there practically any time of day and it's crowded. [Macs] are relatively simple for customers to understand; you can run Windows and it's safe. They've got strong marketing. I'm not surprised it's doing well."

What may be surprising to some, however, is the lackluster sales figures of the iPod: 10.6 million iPods during the quarter, just a 1 percent increase over last year. "The standalone music-player market has kind of played itself out," says Gene Munster, managing director and senior research analyst at Piper Jaffray. "[Apple is] going to have to take the whole product line in a different direction. It'll morph toward a mobile computing theme, variations on the iPod touch," which lets users surf the Web and send e-mail as well as listen to music and watch movies. And speculation is already rampant that the company is preparing to release a third-generation, or 3G, iPhone. Munster and Gartenberg both predict a whole new family of iPhones to gradually unroll in the coming year. ("Maybe a dumbed down version for $200," says Munster.)

Apple's hardware archrival turned a few heads this week as well, but not for its earnings (which, despite falling 11 percent from a year earlier, still exceeded expectations). Microsoft CEO Steve Ballmer suggested in a speech Wednesday in Milan that his company was "prepared to move forward without merging with Yahoo." Ballmer's comments came as Yahoo faced a Microsoft-imposed deadline of Saturday for accepting a $44.6 billion bid for Yahoo--or face a proxy battle to oust Yahoo's board.

For its part, Yahoo reported earnings of 9 percent over the same period last year. Despite the stronger-than-expected showing, analysts remain unconvinced that the company, which has actively been courting other suitors, emerged with a stronger hand. "I think Yahoo ends up in Microsoft's hands," says Brent Thill, director of software research for Citigroup, who called Ballmer's comments "a classic negotiation tactic. We think they're still committed."