Semiconductor investors better get used to that sinking feeling.

Earnings season begins in earnest Thursday, and the numbers won't be good. But as dismal as the second quarter was for chip companies, Wall Street expects to see indications that the third will be worse.

That could take the starch out of these stocks, which have held up surprisingly well considering their declining fortunes: The

Philadelphia Stock Exchange Semiconductor Index

, or SOX, is down just 2% this year. That's because investors have been buying on the rationale that business can't get much worse (the thinking is that it always pays to get in at the bottom of the boom-bust cycle in this notoriously economically sensitive industry). But as growth forecasts continue to plunge, rich valuations could scare people out of these stocks.

Nailing It

Chip companies trying to nail down when the bottom will hit have a tough task. Companies like

Advanced Micro Devices

(AMD) - Get Report



(INTC) - Get Report

, which make chips for personal computers, will have begun receiving orders for the long-awaited back-to-school and Christmas sales season. But they won't know if PC buying will actually materialize this fall -- it didn't last year, and a weak economy suggests that it may not this time around, either.

Companies that focus on the communications sector, from




Texas Instruments

(TXN) - Get Report

, will be happy if they can tell investors that the delayed and canceled orders from their troubled customers have slowed. Most of them have given up hope for a rebound this year because inventories of communications chips and equipment remain massive.

Both the PC and telecom chip makers will be talking about the pricing pressure that has finally arrived in full force. With lots of chips out there and little demand, semiconductors are selling at a fraction of their year-ago prices. That has eaten into companies' margins and isn't likely to ease until supply and demand come into balance. According to

Merrill Lynch

, average selling prices fell 12% in May from the previous year's level.

"We think that most of the earnings estimates for the September 2001 quarter are too high," Merrill said in a recent report. "The problem is a combination of capacity utilization and ASP erosion."

Cheap Cheap

Pricing has hit AMD already. The company warned last week that its earnings would be only a fraction of what analysts had expected, largely due to declining prices on flash memory and on microprocessors, which are used in PCs. It said that revenue was off about 17% in the second quarter from the first and that earnings per share would be 3 cents to 5 cents, not the 27 cents analysts had been expecting, according to

Thomson Financial/First Call

. AMD is scheduled to report its numbers after the market closes July 12.

Microprocessor giant Intel will follow on July 17 with its report. The company said on June 7 that it expected revenue of about $6.5 billion and that margins were on track. Analyst earnings estimates have drifted slightly lower, to 10 cents a share. But even if it does report strong numbers, stock gains may be hindered by its valuation, Merrill Lynch points out. Intel is trading at 55 times 2001 earnings expectations; the last time the sector bottomed, in the fall of 1998, Intel's forward P/E fell as low as 19. Bargain-hunting seems unlikely.

AMD's and Intel's earnings announcements will seem easy to swallow compared to those from the communications chip makers.



will give some insight into how suppliers of chips to cell phones are doing in its earnings conference call on Thursday morning. The company makes not only cell phones but the chips that go into cell phones. It also buys some chips from competitor Texas Instruments, which is due to report July 23.

In recent days, Wall Street has begun bringing down earnings estimates for TI's second quarter. Texas Instruments has consistently guided analysts to expect a 20% decline in revenue, and current expectations are for earnings of 2 cents a share. But

Credit Suisse First Boston

wrote in a research note that the company's "turns" business -- those orders and sales made within the same quarter -- most likely didn't pick up as needed to meet that guidance.

Thomas Weisel

also cut its earnings estimate to 1 cent a share, citing weak cell-phone sales, slow server sales and pricing pressure. (Neither firm has done underwriting for Texas Instruments.)

But the most dismal news will come from the communications chip companies like

Applied Micro Circuits


and Broadcom. Their businesses have all but stalled out because of the decline in spending by telecom infrastructure companies and the subsequent inventory build-up of communications equipment. Both companies are due to report on July 18, and both have issued warnings showing sharp declines in revenue.