NEW YORK (CNN/Money) - A bearish call from Merrill Lynch scared buyers of semiconductor stocks Thursday.

The firm, which has been among the most bullish on the chip industry recently, downgraded its ratings on several chipmakers' shares, including industry leader Intel, saying that investors' hopes for an industry recovery have over-inflated their valuations.

"We think that the investment community has bought into the idea of a second-half recovery, and that's probably going to happen," Merrill Lynch semiconductor analyst Joe Osha told CNNfn's Market Call program Thursday.

"The problem that we have is the stocks are simply not reasonably valued on that recovery, and we've seen no evidence that the business is going to be stronger than expected," Osha added. "On that basis, we said, 'Look, these stocks are fully discounting what's going to happen and we should not buy them.'"

Based on those concerns, the firm lowered to "neutral" from "strong buy" its intermediate-term ratings on: Intel (INTC: down $1.18 to $27.00, Research, Estimates); Linear Technology (LLTC: down $1.51 to $35.65, Research, Estimates); Semtech (SMTC: down $2.14 to $30.42, Research, Estimates); Texas Instruments (TXN: down $0.75 to $27.69, Research, Estimates); and Triquint (TQNT: down $0.91 to $7.47, Research, Estimates).

Merrill also cut to "buy" from "strong buy" its ratings on Analog Devices (ADI: down $1.23 to $34.65, Research, Estimates) and Maxim Integrated Products (MXIM: down $1.22 to $43.29, Research, Estimates).

The semiconductor industry historically has been characterized by boom-and-bust cycles, with periods of tight supply, strong demand and high prices followed by supply gluts and intense price competition among manufacturers.

In a research note it sent to clients, Merrill suggested that the sector hit the bottom of its most recent downturn last August, and has been improving ever since. The chip companies it tracks have shown aggregate revenue growth of 6 percent sequentially in the third quarter of 2001, and 9 percent in the fourth quarter.

At the same time, their stocks are trading at an average 51 times their forecasted earnings for 2002 and 32 times expected earnings for 2003, Merrill said.

"I'd be a lot more comfortable with the group at 20 times [2003 earnings]," Osha said.

Merrill's call on the chip sector overshadowed a more upbeat report from Morgan Stanley, which added Intel to its "buy" list on Thursday and said it is looks for a recovery in chip sales in the future.

After Thursday's closing bell, Intel, the top supplier of PC microprocessors, is scheduled to provide analysts with a mid-quarter financial update. There has been a growing consensus that executives will narrow their targeted revenue range to the lower end of the $6.4 billion-to-$7 billion they previously have said they were aiming for.

The Philadelphia Stock Exchange's semiconductor index, which lists the stocks of 16 chip and chip-equipment makers, fell 14.66 points to close at 453.56 Thursday, a 3.1 percent decline on the day.