Is the tech bear market back?

Technology stocks are suffering a bad year as hopes of a capital spending upturn fade. In the second quarter, 39 of 72 technology firms in the S&P 500 cut earnings estimates, says Jon Markman of MSNmoney.com. Most recently, SAP, Lucent and EMC have added to the gloom, missing earnings forecasts and contributing to the latest slide in markets.

It's usual for both hardware and software companies to suffer a slowdown before business heats up in the second half, says Sarah Lacy of BusinessWeek. But this year's decline has been exacerbated by $77/barrel oil, which could scupper any bounce. And consumer demand which has acted as technology's saviour before also shows signs of strain. Flat screen TV producer LG Philips LCD reported second-quarter sales similar to last year's, despite the supposed World Cup boost. And consumers are unlikely to upgrade their PCs this autumn, given the delay in Microsoft's new operating system, says Robert Cyran of Breakingviews.com.

Technology valuations have already slipped. The bellwether Philadelphia Semiconductor Index is down 13% this year, against 2% for the S&P 500. Yet tech stocks still trade at 23 times next year's earnings 35% above the market as a whole. This premium seems too generous consumers may retrench. There may yet be a brief rally as bulls try to practise a variation of "denial-bordering-on-amnesia", says Bill Fleckenstein of MSNmoney.com. Don't be fooled. With a weak third-quarter looming, the tech bear market which has merely hibernated for the past couple of years is definitely back.

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