Tech Outlook: For Second Half, Cautious Optimism Reigns

Outlook by sector:

PCs

Net stocks

E-tailers

B2B

Optical networking

Wireless

Venture capital

Recent years have taught tech-stock fans to think big.

So with the Nasdaq down 5% this year and last year's fourth quarter producing a stunning 48% advance, investors could be forgiven for awaiting another October Surprise. But don't be seduced by the double-digit returns of recent years, Wall Streeters warn.

The bottom line: The outlook for the technology sector over the rest of the year appears modestly optimistic, say buy-side professionals and other inhabitants of the tech-stock universe. Steady interest rates and normal economic cycles figure to make the latter part of 2000 a good, but not great, environment for tech investing. And though individual sectors produce wildly diverging forecasts, owing to differing earnings and consolidation trends, among others, some broad themes seem to be emerging.

First, Rates

Interest rates, for one. Continuing concern that Alan Greenspan and his colleagues will raise interest rates will keep the tech market "pretty choppy" over the next few months, says Garry Betty, CEO of Internet service provider EarthLink. Rising rates and the prospect of further increases, says Betty, have caused institutional investors to pull back from tech stocks. By the fall, Betty predicts, those Fed -centric concerns should calm down, and institutional investors will return to tech stocks.

Up and Down Nasdaq Comp in 2000

Source: BigCharts

Chip Morris, manager of the T. Rowe Price (PRSCX)Science & Technology fund, agrees that the rate-rise hump is a big one. "I think that's one of the issues that's going to turn sentiment around, just like it did last year," he says.

The Spending Picture

Bob Turner, chief investment officer of Turner Investment Partners and lead product manager of the Turner (TTECX)Technology fund, says he sees no sign of spending slowdowns in areas such as telecommunications -- especially in the optical networking area -- and business-to-business software and exchanges. Moreover, as companies spend the money they've allotted for the year, they usually engage in a "year-end budget burn" on technology purchases. "Typically, technology does better in the second half of the year. And we don't think anything is different this year," he says.

Alan Harris, senior portfolio manager of the Munder (MTFAX)Future Technology fund, says customer demand for technology goods and services is looking good. Most countries throughout the world are showing good growth, low inflation and low unemployment, he says. In that environment, the only way to improve profits is through greater productivity. And rather than seeking longer hours from employees, companies will turn to tech investing for productivity gains. That, he says, "provides decent visibility for future technology-related spending by businesses."

Though the tech outlook appears good, don't get spoiled by some of the remarkable tech-stock returns over the past few years. As Chip Morris of T. Rowe Price bluntly puts it, "the problem with the tech market is you have knuckleheads with great expectations that can't be met."

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