NEW YORK (CNN/Money) - The Nasdaq began the year around the 2000 level and after six months, it's still there. Along the way, though, tech investors have had quite a gut-wrenching ride.
Here's a quick recap.
During the first three and a half weeks of January, the Nasdaq surged 7.5 percent, fueling hopes that tech stocks were set for another big year. Strong earnings news helped feed that expectation.
Then techs cooled off drastically. Despite continued good earnings news, the Nasdaq fell 13 percent from its 2004 peak in late January to its mid-May low point of about 1875.
But since mid-May, techs have enjoyed a bit of a rally (don't call it a comeback), with the Nasdaq rising about 8 percent to get to where we are now. Whew.
Now on to the second half.
A summer rally...
Michael Mahoney, managing director with EGM Capital, a hedge fund that specializes in tech and telecom stocks, thinks tech stocks could enjoy a nice summer rally since second-quarter earnings growth should be blockbuster.
According to Thomson First Call, second-quarter earnings for the S&P tech sector are forecast to increase 55 percent from a year ago. That's up from estimates of 48 percent annual growth at the start of the quarter. Those numbers will begin rolling in during mid-July.
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| It's up! It's down! Where will the Nasdaq head during the second half of 2004? |
Mahoney thinks software stocks, a tech laggard during the first half of the year, will start to show some signs of life. He argues that as the economy continues to improve, corporations will shift from hardware upgrades to updated software for all the new computers and servers they have purchased.
But Mahoney said that chip stocks, which have also been among the sector's biggest laggards this year, will probably continue to underperform other tech stocks since growth is starting to slow after a strong 2003 and first half of this year. Plus, many chip stocks still have pricey valuations.
However, Barry Ritholtz, chief market strategist with Maxim Group, thinks that it will be tough for tech stocks to move higher in the second half of the year unless semiconductors recover since they tend to lead tech sector rallies.
| * as of June 29 | | Source: Thomson/Baseline |
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"When the Nasdaq catches a cold, semis get pneumonia. But when the Nasdaq gets healthy these things take off like they're on steroids," Ritholtz said.
Ritholtz is expecting chip stocks to bounce back and adds that Internet stocks, which have been the top tech sector in the first half, should remain hot as momentum investors continue to plow money into what did well in the first half of the year.
...followed by a pullback in the fall?
Still, even if techs do well during the summer, a surge might be temporary. Gint Rimas, an analyst with Thomson First Call, said that solid earnings reports would probably pique investors' interest.
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But once earnings season is over, the sector's fit fundamentals might take a back seat to lingering worries about rising interest rates, Iraq and the upcoming U.S. presidential election.
"If you look at just earnings, it paints a positive picture for tech," Rimas said. "But investors have other concerns."
What's more, even though techs are expected to report large gains in third quarter earnings, the level of annual growth is starting to tail off. Analysts are predicting third-quarter tech earnings gains of 37 percent.
For this reason, Mahoney thinks that investors might once again start to question whether tech stocks are worth premium earnings multiples, especially as interest rates rise. Currently, the S&P tech sector is trading at 26.2 times 2004 earnings estimates, compared to a P/E of 17.8 for the S&P 500.
"We're at the beginning of tightening cycle so tech valuations probably can't expand a whole lot from where they are," said Mahoney.
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