Techs keep partying...for now
IBM, Microsoft and other tech leaders reported healthy earnings, but can the sector keep up the momentum heading into '07?
By Grace Wong, staff writer

NEW YORK ( -- The latest round of tech earnings looks promising, but investors shouldn't get too excited, analysts and investors warned.

The majority of tech companies in the S&P 500 that have reported results so far - 32 out of 43 firms - have beat expectations, according to earnings tracker Thomson First Call.

The tech-heavy Nasdaq Composite has been on a tear since hitting a 52-week low in the summer.

That list includes blue chips such as IBM (Charts) and Microsoft (Charts), as well as growth firms like Apple (Charts) and Google (Charts).

The results aren't all that surprising, since the second half of the year tends to be seasonally strong for the tech sector, said Gene Sit, chief investment officer of the Sit Science & Technology Growth fund.

The big question now is whether techs be able to carry the momentum into next year.

"The results have been good enough to sustain the recent rally in the Nasdaq, but I think it's important to look at guidance going into the fourth quarter and fourth-quarter results," said Ryan Jacob, portfolio manager of the Jacob Internet Fund.

A growing belief that the economy will be able to manage a so-called soft landing has helped boost the Nasdaq, which has rallied 17 percent since hitting a 52-week low July 18.

"The market seems to be taking the view that economy is going to skirt a recession," said Mark Demos, an analyst at Fifth Third Asset Management.

Outlooks shaky

But while techs have reported mostly good earnings - tech earnings grew 9 percent in the third quarter from the year-earlier period, according to Thomson - the outlooks they've issued has been skewed to the negative.

Of all the companies in the tech sector that have reported earnings so far, the ones giving negative guidance have outnumbered those that issued a positive outlook by a margin of nearly 2 to 1.

It's important to remember, however, that tech covers a wide range of sectors - from networking to software to Internet companies - so it's difficult to make a pronouncement on how the entire group will perform going forward, said Sit.

Jacob echoed that view, adding that some sectors are better poised going into next year than others.

He said he would be cautious about hardware and chip companies, which could see a slowdown as businesses and consumers hold off on purchases ahead of the launch of Vista, the latest update to Microsoft's Windows operating system.

Vista is due to ship to consumers in January.

On the flip side, Internet advertising continues to remain robust, which bodes well even for companies that have been challenged in that sector, such as Yahoo (Charts).

Investors may have a better sense of how tech is poised to do when more big names in the industry report earnings in the next few weeks. Cisco (Charts) kicks off the next round of results Nov. 8, followed by PC heavyweights Dell and HP the following week.

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