Every quarter, it seems, the time between earnings seasons gets shorter and shorter. While the ink from the first-quarter numbers is barely dry, a recent report suggests that the best may be yet to come for two major sectors.

Evidence that recent interest-rate hikes have finally begun to slow the economy is widely believed to be bad news for company earnings. But for the oils and semiconductors -- look out!

So says a report by


. Analysts have been revising earnings and year-on-year growth projections for the energy and technology sectors, led by oil and semiconductors, in upward leaps and bounds since early this year.

And May earnings-revisions ratios for these two sectors are higher than those in any other market segment, says the report. Calculated as total analyst-estimate increases over total analyst-estimate decreases, earnings-revisions ratios measure how much faster than expected earnings are growing and how much optimism about earnings exists in the market.

According to I/B/E/S, oil and semiconductor earnings-revisions ratios for 2000 are at their peaks for the year. Oil's ratio for April 27-May 25 was 2.81 vs. 1.64 a year ago, while semiconductors' ratio was 6.17 vs. 3.27 a year ago.

Going forward, these two metrics should continue to suggest bullishness, says Joseph Kalinowski, an I/B/E/S equity strategist and author of the report.

So what is sustaining this earnings momentum in the face of an expected slowdown in the economy? This Old Economy/New Economy duo might seem an unlikely pair, but oils and semiconductors actually have quite a bit in common.

Sector analysts say earnings in the two industries are less susceptible to changes in the U.S. economy and interest rates because they move according to industry-specific supply and demand cycles. And both are at peak demand periods.

The supply and demand cycles are driven partly by conservative investment strategies and partly by the lag time between capital investment and production in the two industries. These companies like to play it safe because of volatile price and inventory conditions, and they invest capital in new projects only when demand is already high and margins are expanding vigorously. It takes a while before this investment is reflected in increased production because new oil-production sites and chip factories take lots of infrastructure and time to build.

This conservatism also pays off when it comes to interest rates because it means the companies hold almost no debt.

Both industries recently went through periods of low capital spending, so production is low and supply shouldn't catch up with demand until late next year, for either industry.

In the crude-oil industry, great oversupply and lower demand in the Far East -- after that region's 1998 economic crisis -- fueled bearishness in the sector, and oil sank to $10 a barrel that year. This forced companies to cut production capacity. Today, lower supply and Asia's economic recovery mean that demand is outstripping supply and prices have soared, lately up almost 20% vs. last month, to $30 a barrel.


oil industry has seen capital depart in recent years ... as a result we have issues whereby production capacity for crude oil and refined products has tightened, which is good news for these companies," said Douglas Terreson, an oil analyst at

Morgan Stanley Dean Witter


Meanwhile, it is unclear whether


really plans to add 500,000 barrels a day to world supply as it promised in March. OPEC officials recently said they didn't think it was necessary, but Saudi Arabia's oil minister today said OPEC isn't happy with artificially high prices that could harm producers and consumers.

On June 2,

ABN Amro

analyst Eugene Nowak raised his 2000 and 2001 EPS estimates for leading energy firms to reflect strong commodity prices.

According to Matthew Warburton,

UBS Warburg's

oil analyst, oil inventory "cover," or the time it takes to fill an order, is near its historic lows. While inventories are already being rebuilt, supply shouldn't catch up with demand until late next year, he said.

Supply, Demand Make It 'Semi-Tough'

It's the same story in the semiconductor industry.

Oversupply and slow demand between 1995 and 1998 meant companies cut back on capital spending, and only now are putting cash into new production.

Meanwhile, demand is being driven higher by three primary trends: the development of Internet infrastructure, growth in the wireless industry and a boom in the production of digital consumer products.

"Today, in addition to expansion of IT networks at companies, you've also got a buildout in Internet infrastructure, plus broadband tech for consumers and businesses, plus consumer demand. This means more groups driving demand than just PCs and PC networks," said

Bear Stearns'

semiconductor analyst Charles Boucher.

And it will probably be another 20 to 24 months before supply exceeds demand, says Mark Edelstone, the semiconductors analyst at Morgan Stanley Dean Witter, because the time between start-up and full production is usually about 18 months for new factories.

What They Like

In the oil-production sector, Terreson recommends

BP Amoco





, with 65 and 33 price targets.

Among refining and marketing companies, he likes


(VLO) - Get Report




, both with price targets of 40. Morgan has served as a banker for all of these companies.

Meanwhile, Bear Stearns' Boucher says that while the rising tide in semiconductor earnings will benefit all companies in the sector, he recommends those companies that will do well in both up and down cycles because of their proprietary content. These include

National Semiconductor



Texas Instruments



Analog Devices

(ADI) - Get Report


LSI Logic

(LSI) - Get Report


Lattice Semiconductor

(LSCC) - Get Report


Bear Stearns doesn't do underwriting for any of these companies.