NEW YORK (CNN/Money) - The overall market took a tiny bit of a breather during the summer -- but not the tech sector.

The 95 tech and telecom stocks in the S&P 500 finished the third quarter with a 10.3 percent gain, compared with just a 2.2 percent rise for the S&P 500. Now, with third-quarter earnings just around the corner, it is time to see if this run was justified.

At first glance, earnings estimates for the tech sector would appear to be impossibly high. According to First Call, analysts are expecting the S&P tech sector to post an 81 percent earnings increase from a year ago.

However, once you take out Lucent (LU: Research, Estimates) --expected to report a loss of 4 cents per share in the third quarter, compared with a loss of 84 cents a share last year -- the expected earnings growth rate for technology companies is a more reasonable 22 percent.

Few tech companies have issued third-quarter earnings warnings so far, which is encouraging. According to research from Arnie Berman, chief technology strategist for Soundview Technology Group, only nine tech firms have warned so far, the lowest level of negative preannouncements in more than three years.

In fact, more companies have announced positive revisions to their earnings forecasts than negative revisions -- a phenomenon that Berman said has never taken place.

Semis sizzle, software sags A look at expected 3Q earnings growth by tech subsector. Subsector  EPS growth  Semiconductors  206%  Tech services  29%  Computers  26%  Hardware and equipment  26%  Software  6%   * for Dow Jones industry groups  Source:  First Call

Looking at individual sectors, semiconductors are expected to report a gangbuster third quarter, with expectations of a 206 percent increase in earnings from a year ago.

Chip stocks have led the tech earnings preannouncement parade with Intel (INTC: Research, Estimates), Cypress Semiconductor (CY: Research, Estimates), and RF Micro Devices (RFMD: Research, Estimates) all indicating in September that their third quarter numbers would be better than expected.

Not surprisingly then, semiconductor stocks were among tech's best performers in the quarter. Intel rival Advanced Micro Devices (AMD: Research, Estimates) was the biggest gainer, with its stock surging 73.3 percent in the third quarter. National Semiconductor (NSM: Research, Estimates), Intel, Texas Instruments (TXN: Research, Estimates), and LSI Logic (LSI: Research, Estimates) all soared more than 25 percent in the quarter.

Notable laggards came from the software sector, as analysts are forecasting just 6 percent earnings growth from a year ago. To that end, Siebel Systems (SEBL: Research, Estimates) and PeopleSoft (PSFT: Research, Estimates) gained just 3 percent and 4 percent, respectively, in the quarter, while Oracle (ORCL: Research, Estimates), Compuware (CPWR: Research, Estimates), and BMC Software (BMC: Research, Estimates) all fell.

Top five techs The best performing tech and telecoms in the S&P 500 during the third quarter. Company  % change  Advanced Micro Devices  73.3%  Novell  70.4%  Avaya  68.7%  National Semiconductor  63.7%  Solectron  56.4%   Source:  Thomson/Baseline

What's more, the software outlook could get worse in the coming days. "Software companies have a nasty habit of doing so much of their business in the last moments of the quarter that they typically only confess once the quarter has come to a close," Berman wrote in his report.

Still, there were some exceptions to the software slump. Symantec (SYMC: Research, Estimates) surged 43.9 percent in the quarter as several new worms and bugs raised awareness of the company's Norton anti-virus product. And graphics software developer Adobe Systems (ADBE: Research, Estimates), which reported better-than-expected earnings in September, soared 22.8 percent.

Among the big losers overall, there was a common theme: disappointing fundamentals.

Hewlett-Packard (HPQ: Research, Estimates) fell 9.1 percent. The world's No. 1 printer company reported lower than expected fiscal third quarter sales and earnings in August. Rival Lexmark (LXK: Research, Estimates) warned in July that its earnings would be much lower than expected and as a result, its stock fell 11 percent in the quarter.

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More recently, Baby Bell Verizon (VZ: Research, Estimates) and server manufacturer Sun Microsystems (SUNW: Research, Estimates) issued dour forecasts for the third quarter. Their stocks plunged 17.8 percent and 28.8 percent, respectively.

Earnings aside, the other big question that will dominate discussions about tech stocks is valuation. Although many companies are expected to post strong third-quarter results, the prices appear to reflect this. The S&P Tech sector is trading at 29 times earnings estimates for the next four quarters.

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Some of the pricier tech stocks have cooled off a bit, despite expectations of solid results.

Yahoo! (YHOO: Research, Estimates), which reports earnings next week, is expected to post an earnings increase of 80 percent in the third quarter. But its stock lagged the broader tech sector's gains, with an 8 percent gain in the quarter. In addition, the stock has been relatively flat since its last earnings report. The stock trades at 70.5 times 2004 earnings estimates.

Dell (DELL: Research, Estimates), the PC market share leader, gained just 5 percent in the third quarter despite reporting a 16 percent increase in fiscal second-quarter sales and 24 percent jump in earnings in August. The stock trades at 28 times earnings estimates for its next fiscal year, a substantial premium to rivals HP and IBM (IBM: Research, Estimates).