Tech stock investors should be experiencing cognitive dissonance. Microsoft shares thundered out of the gateon Friday morning, adding $13bn, or 5 per cent, to the software maker’s market capitalisation after better first-quarter profits than expected. In spite of sales being 14 per cent lower compared with the previous year, earnings were a fifth higher than analysts had anticipated – thanks to superior cost-cutting. Management then reassured investors that spending would remain under control into 2011.

Yet a recovery in business spending, not cost-cutting, is what is factored into the continuing tech rally. After the PC market shrank this year, the argument is that a need to replace worn-out computer kit will return it to strong growth – helped by a desire to upgrade to Windows 7, the latest version of Microsoft’s operating system launched this week. Microsoft, though, cautioned that corporate IT budgets are still very tight and likely to grow only slowly. The initial favourable consumer reaction to Windows 7 is helpful but the businesses that provide the bulk of tech spending weigh decisions to upgrade very carefully – particularly when shareholders are pressing them to keep costs under control.