NEW YORK (CNN/Money) - Looks like the war in Iraq didn't have a big impact on the tech sector, after all.
First-quarter earnings for the 56 of the 80 S&P 500 technology companies that have already reported have increased 14 percent from a year ago, according to First Call. When all is said and done, analysts think growth will be about 16 percent -- crushing the forecast of 10 percent growth that analysts were predicting at the beginning of April.
But ...
At the beginning of the year, analysts were expecting earnings growth of, well, 16 percent. "We've seen expectations cut and cut and cut. When you lower the bar enough, eventually it becomes easy enough to hurdle over," said Barry Ritholtz, chief market strategist for Maxim Group.
The second half will be huge! Or will it?
A similar pattern seems to be emerging for the second half of the year.
Analysts are expecting tech sector earnings to increase 20 percent in the second quarter, 53 percent in the third, and 27 percent in the fourth.
These high hopes are based on the idea that the economy is going to get better (i.e., businesses will finally start spending again) and comparisons are easy (last year's numbers were so bad that big growth numbers are no problem to achieve).
The market has bought into this argument. The S&P Tech index is up 6.3 percent since the beginning of the year, making it the second-best performing sector. (Consumer cyclicals are up 7 percent.)
But is there any reason to think that these second-half estimates are reasonable, and that estimates won't come down substantially, just as they have for the past two years?
Ritholtz said that while most tech companies have done a good job of cost-cutting, there needs to be a real pick up in demand.
Ken Perkins, an analyst with First Call, said that this is similar to what analysts were thinking about tech the same time a year ago. "There doesn't seem to be anything suggesting there is going to be a boom in spending in the second half, so estimates are probably a little bit high like last year," he said.
At this time in 2002, analysts had extremely high expectations for the second half of the year because comparisons were even easier due to the slowdown following 9/11. Analysts were predicting a 132 percent increase in tech earnings for the third quarter of 2002 and an increase of 72 percent for the fourth quarter.
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At the beginning of the third quarter, analysts were still expecting 118 percent earnings growth for the third quarter and an increase of 64 percent in the fourth quarter. Actual growth turned out to be much lower. For the third quarter, earnings were up 29 percent from the third quarter of 2001, while fourth quarter earnings increased 23 percent.
And because these growth rates were substantially lower than what analysts were hoping for, the tech stock malaise continued last year.
Ozan Akcin, chief market strategist for Ehrenkrantz King Nussbaum, doesn't think that tech earnings estimates now are as unreasonable as they were a year ago since most companies have continued to cut costs. He thinks that third-quarter earnings will likely be about 40 percent higher than last year.
That's still a more than respectable growth rate. It's just not as spectacular as what most analysts are expecting. So get ready for estimates to come down if capital spending still hasn't picked up by the summer. And if that's the case, tech stocks are likely to cool down as well.
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