Goldman Sachs told clients looking to allocate into technology shares to put their money in software on the grounds that the sector's 2003 run-up probably isn't over.

The brokerage raised its sector rating on software to attractive from neutral, saying additional improvements to the U.S. information-technology spending picture and the likelihood of improvement in Europe could extend the rally.

Goldman's software index is up 36% this year, trailing the gains put up by semiconductor and other technology hardware groups. While software names already reflect expectations for a strong fourth quarter and 2004, "high operating leverage" suggests they'll benefit from any upside created by a faster-than-expected spending improvement or a recovery in Europe, Goldman said.

"Software companies in general have been steadily reducing their cost bases during much of the downturn," Goldman said. "We expect most vendors to keep costs down as business improves. In an environment of improving license revenue .... we expect much of this gross profit to move directly to operating income and EPS."

Among specific names, Goldman said it expects


(MSFT) - Get Microsoft Corporation (MSFT) Report

to raise its dividend or buyback program at an upcoming board meeting, and said


(SAP) - Get SAP SE Sponsored ADR Report

should benefit from the recent recovery in the dollar. Goldman said


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could see more upside based on expected government spending and seasonally stronger enterprise sales in the December quarter. The brokerage expects


(ORCL) - Get Oracle Corporation Report

to benefit from continued strong IT spending but warned its valuation is fairly high, and said

BEA Systems


is fairly valued at current levels using a discounted cash flow analysis.

Among shares mentioned, Oracle was recently up 23 cents, or 2%, to $13.06; Microsoft was up 23 cents, or 1%, to $26.75; and



was up 35 cents, or 2%, to $18.40.