Spending Surveys Slight Tech Rally Hopes

It's spring and the Nasdaq is in the tank -- so it must be time to prepare for the end-of-year tech rally.

We've seen the late surge in six of the last seven years and with a basket of bellwether technology issues trading at or close to a market multiple, it may well happen again, say Goldman Sachs analysts Laura Conigliaro and Rick Sherlund.

"In recent history, tech has rallied to end both good and bad years and has started earlier in the past two years, moving from October to mid-August," they write. The rally could start as early as July when the second-quarter preannouncements come to an end, "but investors must first slog through difficult seasonal business, including the overhang of a very weak Europe."

Difficult is right. The possibility of a late rally is wrapped around Goldman's latest IT spending survey, and that news is worrisome. Growth in 2005 IT operating budgets, and in IT capital budgets, will slow to 3% and 2%, respectively, from earlier readings of 3.6% and 2.9%, according to a survey of 100 IT managers with purchasing authority at large multinational corporations.

Coincidentally, a more anecdotal report -- also published Thursday, by Prudential Securities analyst Brent Thill -- points in much the same direction.

After listening to presentations by the chief information officers of companies including Unilever(UL Quote - Cramer on UL - Stock Picks), Lockheed Martin(LMT Quote - Cramer on LMT - Stock Picks), BP(BP Quote - Cramer on BP - Stock Picks) and Kaiser Permanente, Thill wrote: "Perhaps the most striking statement was how software was shrinking as a percentage of the overall IT budget."

Indeed, according to BP's chief information officer, of the company's $2 billion budget this year, only $120 million, or 6%, will be spent on software. And of this $120 million, about $90 million will be spent for renewals of past purchases, leaving only $30 million for new software purchases.

"Any way you slice it, this is not encouraging for software spending," Thill added.