Can We Keep Counting on Tech Stocks’ Strength?

Are the big-name technology stocks that have carried the stock market this year in danger of finally giving way?

After last week’s deep market sell-off--capped by a 266.90-point fall in the Dow Jones industrial average on Friday--that could be the most important question for investors ahead of a possibly volatile trading day Monday.

If leading tech stocks such as Microsoft and Intel hold up--as they have consistently during market corrections in the last couple of years--then the bull market is likely to remain intact, despite the widespread belief that stock prices may fall further this month, some analysts say.

In this scenario, high-profile tech stocks could still fall in the current correction in line with the rest of the market. But they would avoid the steeper drops--20% to 50%--that the most bearish analysts have predicted.

However, if richly priced tech leaders crumble under the weight of rising interest rates, the market as a whole may be in for far heavier losses, they say.

Roughly a dozen big-name technology stocks--including Cisco Systems, Sun Microsystems, Dell Computer, Oracle, Qualcomm and EMC --have played an outsize role in the stock market’s sizzling gains in recent years, particularly so in 1999.

The rest of the market--including former leading groups such as financial stocks--have faltered this year. But strong showings from large tech stocks have been the primary reason that the major stock market indexes still have gains in 1999.

Sun Microsystems’ stock price has more than doubled this year, and Qualcomm’s has surged more than sevenfold. Microsoft, Intel and Cisco are up between 20% and 45%.

Some speculative Internet-related stocks have notched even more fantastic gains. But the stock performance of established companies with far larger revenues are considered to be better barometers of the health of the market and state of the economy than the relatively young Internet firms.

Many Americans own stakes in these big-name tech stocks, either directly in brokerage accounts, or indirectly through mutual funds and 401(k) accounts. The leading tech stocks, in fact, are a staple of many of funds in 401(k) retirement accounts.

Though the market officially sank into a correction on Friday--with the Dow now down 11.5% from its Aug. 25 high--last week offered some hope for these high-profile tech stocks, experts say.

For example, Sun Microsystems reported late Thursday that its fiscal first-quarter earnings had more than doubled, thanks to surging sales of large computers that run Internet Web sites. Its shares rose 3.5% on Friday even as troubling inflation data and comments from Federal Reserve Chairman Alan Greenspan prompted a 2.8% loss in the Standard & Poor’s 500-stock index.

“If people were really worried, they would be taking money off the table on those earnings,” said Nick Moore, a tech-stock analyst at mutual fund firm Jurika & Voyles. “There is not all this money poised to come out, which is what you would see [in a bear market].”

Moore and other analysts say the results from Sun Microsystems point up the fact that tech earnings are extremely strong, hardly the conditions for a prolonged sell-off, they say. The growth of the Internet and the budding economic recovery in Asia bode well going forward.

The stocks of semiconductor makers and producers of related equipment, for example, have been strong because investors expect global demand for chips to rise.

Says Kevin Landis, manager of the Firsthand Technology Leaders fund: “I don’t see technology slowing down, and I don’t see any of these companies stumbling badly.”

Investors will be lured by the steady growth of the big-name companies, tech bulls say. “The market is putting an increasing premium on earnings stability,” which is one reason that tech companies have been so prized, said Jim Paulsen, chief investment officer of Wells Capital Management.

Not everyone on Wall Street is so sanguine.

After peaking in July, the market has weakened amid fear that nascent inflationary pressures will force the Fed into a series of short-term interest-rate hikes. The Fed has nudged up rates twice this year, on June 30 and Aug. 24, and speculation is building that a third boost will come before ’99 is out.

That could be especially harmful to big-name tech issues, which are among the most richly valued stocks. For example, based on projected 1999 earnings, the price-to-earnings ratio of Cisco Systems is 69. That towers over the S&P; 500’s P/E of 26, which itself is near an all-time high.

As rates rise, the economic outlook becomes cloudy and investors are therefore less willing to pay up today for the prospect of impressive earnings tomorrow. In simple terms, that means that the P/Es of the most richly priced stocks could fall.

“Large-cap stocks, including large-cap technology stocks, will underperform the market, and the market itself will be down,” said Peter Anderson, chief investment strategist at American Express Financial Advisors. “They’ve had huge runs, and many are sporting huge price-earnings multiples.”

The fate of tech stocks is especially critical now because the broad market has been so weak. The number of stocks that fall in price on any given day has consistently outpaced the number that rise in price.

Many analysts say that scenario can’t last forever. Eventually, the vast majority of stocks must begin to rise alongside the leaders, or the top stocks must crack.

Tech stocks have other problems, Anderson said.

Though “business couldn’t be better” for most companies, earnings expectations are so high that some firms are likely to fall short of what Wall Street wants, Anderson said.

A couple of years ago, it was important for the quarterly earnings of a company to meet or exceed the “consensus” earnings estimate of Wall Street stock analysts. Today, however, companies must beat the “whisper” number, a higher figure that circulates by word of mouth in the days leading up to a profit release date.

Topping a consensus estimate but falling shy of a whisper number can provoke a sell-off. That’s what happened last week to Motorola, which saw its stock slide the day after saying third-quarter earnings had surged more than eightfold to meet consensus projections.

“The problem is analysts have been whispering up the earnings numbers on these stocks for weeks to a point at which companies report good earnings but the stock doesn’t reach the whisper number,” Anderson said.

Only a few big-name tech companies have reported quarterly earnings so far. But the results overall seem to demonstrate strong prospects:

* Last week’s selling was spurred initially by Intel’s third-quarter earnings report late Tuesday, which showed that the chip giant had fallen 2 cents per share short of consensus estimates.

But the shortfall stemmed in part from temporary manufacturing glitches rather than a drop-off in customer demand. Also, average prices suffered a bit as Intel captured a bigger market share in the low end of the market for personal-computer chips.

“Intel is still Intel,” Moore said.

The company is working furiously to become a supplier of chips to servers and other high-end computers. The server market, for example, is growing at more than twice the rate of the market for PCs.

“People will keep buying computers, and Intel is starting to grow into other areas,” fund manager Landis said.

* Sun Microsystems’ profits are increasing as it sells more large computers that companies use to run their Internet sites. Net income for the fiscal first quarter ended Sept. 26 jumped to $271.1 million from $113.9 million a year ago.

Competitors such as Hewlett-Packard and Unisys have said that revenue growth will fall short of estimates, a sign that Sun may be gaining market share.

* As for a top Internet company, Yahoo two weeks ago reported third-quarter earnings that easily topped Wall Street estimates. Revenue more than doubled as advertising growth at the Internet portal appears strong.