Technology companies, which face another round of virtual earnings collapses in the fourth quarter, are nevertheless at the forefront of the current bull market. Meanwhile, traditional recovery harbingers like financial stocks bring up the rear.

Some say it's a sign the current bull market is nothing more than a vestige of a strategy they hoped had been discredited: momentum investing.

Since a postattack low on Sept. 21, the

Nasdaq Composite is up 36%, outperforming both the

Dow Jones Industrial Average and the

S&P 500 over the same period. And certain individual stocks make that gain look paltry:

Sun Microsystems

(SUNW) - Get Report

is up 70% since Sept. 21, for example, while

Avant!

(AVNT)

is up 204%.

Financial stocks, which often do well in the first stage of a rebound, haven't performed as well. From October 1998 to April 1999, the Philadelphia Stock Exchange/KBW Bank Index rallied 46%, for example. This time around, the bank index is up 19% since Sept. 21 -- still a healthy gain, but nothing like the explosion in technology shares.

While there are risks in putting money in banks now -- bad loans, a slowdown in new issues, and the longer-term possibility of rising interest rates -- the two groups' divergent performances has analysts scratching their heads. While the strength in financial stocks could be a prudent bet on recovery, the rally in technology issues rings of something else.

Froth Redux

"As the first signs emerge that the bull is back, money begins to chase the former leaders and highflying stocks," said Todd Salamone, director of research at Schaffer's Investment Research. "Fresh in investors' minds is that technology stocks led the last bull market."

"We haven't wrung out the momentum investing strategy," said Chuck Hill, director of research at Thomson Financial/First Call. "Things haven't changed? People still think technology is going to go back to the valuations of 1999 and 2000. I think that's unrealistic."

Though technology stocks have borne the brunt of the current economic downturn, they are still the most vulnerable to earnings weakness. Third-quarter earnings for the S&P Technology Index have fallen 71% from year-ago levels. Consensus estimates call for them to drop 62% in the fourth quarter.

Beginning next week, companies will start giving investors a better sense of their outlooks for the fourth quarter. The pace of those preannouncements will likely fall off around the holidays, and then pick up again in January.

"I don't think technology earnings are going to bounce back as soon or as much as they did following other downturns," said Hill. "I would have thought investors would realize this already."

Among the companies to have warned about earnings recently,

Oracle

(ORCL) - Get Report

said on Nov. 13 that it expects to miss earnings estimates in its second quarter. Still, it is up 38% since Sept. 21.

"Bad news hasn't translated into horrible stock price performance, because investors think things are going to get a lot better," said Thomas Van Leuven, a strategist at J.P. Morgan. "We're concerned the weakness could persist."

No Bargains

Many technology stocks are trading at a premium to the market. "Some investors decided tech stocks were bargains because they dropped 70% or 80% in value," said Van Leuven. "But to us, it doesn't mean they're attractive."

McData

(MCDT)

, for one, has surged 139% since Sept. 21. But using 2001 earnings, the data storage company trades at a price-to-earnings multiple of 169. Based on 2002 earnings, it has a P/E of 139.

"There's a strong probability that capital spending is going to be weak in 2002, maybe weaker than it was in 2001," said Van Leuven. With capacity utilization already anemic, "it's not clear that corporate America needs to do a lot of investing in anything."

The overhang from the investment boom is likely to pressure profits for some time. "Business investment spending is not going to be leading us out of this recession," said Josh Feinman, chief economist at Deutsche Asset Management. "It's going to be following."