Tech Trend: Friend or Fantasy?

Many companies that warned early were relatively small, like Borland(BORL Quote), Ariba(ARBA Quote) and RSA Security(RSAS Quote).

IBM and Siebel Systems(SEBL Quote) are certainly large, but IBM's sales drop-off in March proved to be the exception to the rule, while Siebel's poor quarter had to do with a variety of internal factors, including execution so poor the company fired its CEO.

Similarly, Linear Technology(LLTC Quote) issued targets below Wall Street's expectations, citing "general concerns in the macroeconomic environment," but overall chips pulled out a reasonably good quarter.

Sound like a mixed bag? It is, and that worries Brent McGibbon, head of McGibbon Asset Management. "Lack of definition [consistent pattern] is a problem. There's no clear path to see when techs will be strong," he says.

Still, there's plenty of talk that technology stocks will take off at the end of the year. A late surge has been seen 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, Goldman Sachs analysts Laura Conigliaro and Rick Sherlund said in a recent note.

"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 wrote. 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."

Ursillo called the June quarter a potential pothole on the way to a late rally. "The second quarter tends to have more disappointments than any other." That's because investors usually figure that the second quarter, sandwiched between two typically weak periods, will be strong. The problem, he says, is that expectations are sometimes too high, so companies that report in line, rather than with upside, are punished.

Interestingly, in that same note, the Goldman analysts also saw signs of weak IT spending. 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.

Another rally stopper could be the Federal Reserve. Unless Chairman Alan Greenspan gives some indication that the Fed is nearly done raising interest rates, "there won't be much of a rally," says McGibbon.

Then there's the point of view of Gus Zinn, an analyst with Waddell & Reed Investment Management. Although he concedes that tech spending has gotten back-end loaded, he's not at all sure that implies the late rally. "If everyone expects it, there won't be one. We just try and find the best companies," he says.

If Zinn is correct, the lesson of the last quarter becomes a harsh one. Technology investors need to be stockpickers. The sector may simply be too uneven to make money any other way.