Technology valuations are expanding again, but not everyone thinks dire comparison to bubble psychology is warranted. Because

price-to-earnings ratios often rise during periods of depressed earnings, some analysts argue, the recent jump might be justified.

When profits pick up, they say, P/E ratios should fall. But 2002 estimates are extremely shaky right now, and even if companies do show growth year-over-year, per-share earnings levels will remain very sluggish.

"You shouldn't pay a peak or even an average multiple at the peak of the earnings cycle because it's not sustainable," said Chuck Hill, research director at Thomson Financial/First Call. "Obviously you pay more a little more for stocks during the trough because depressed earnings aren't representative of a company's true earnings power."

Maybe that's why the

Nasdaq has rallied 37% from Sept. 21 despite forecasts that fourth-quarter earnings for technology companies will drop 63%. For the first quarter, earnings are expected to fall 30%, according to Thomson Financial/First Call. In late September, the tech sector traded at roughly 50 times 2001 earnings and 33 times 2002 estimates, according to Morgan Stanley analyst Steve Galbraith. The sector now trades at 68 times this year's estimates and 45 times next year's projections.

"Amazingly, the tech sector now trades at virtually the same multiple of forward earnings as it did during the bubble," Galbraith said.

Some analysts suggest that investors are looking "beyond the valley" to better times ahead. After all, using a May-to-May fiscal year, earnings from the tech sector are expected to rise 34% in the second quarter of 2002, 128% in the third quarter and 44% for all of next year, according to Thomson Financial/First Call.

Coming Down

Still, the rate of downward earnings revisions shows no sign of abating at this point and those estimates are highly unreliable. Meanwhile, using a calendar year, earnings per share for technology companies are only expected to reach $21.89 in 2002, compared with $34.95 in 2000 and this year's projected $19.12, according to Thomson Financial/First Call.

"It's going to take some time, possibly two or three years until we get back to the solid earnings per share figures we saw in prior years," noted Joe Kalinowski, an analyst at Thomson Financial/First Call.

Ed Yardeni, chief investment strategist at Deutsche Banc Alex. Brown, is expecting just 21% growth in tech earnings next year, which he said would put earnings per share at 1995 levels.

Given that the actual dollar amounts will be so weak, Hill prefers to value stocks based on fiscal 2003 estimates because while further out, "they will be closer to more normal levels." In fact, technology earnings per share are estimated to hit $32.86 that year.

Based on these assumptions, however, stocks still look "fairly priced or way overpriced."

Sun Microsystems

(SUNW) - Get Report

, for example, trades at 59 times 2003 earnings, Hill said.

EMC

(EMC)

has a multiple of 128, and

Cisco

(CSCO) - Get Report

and

Texas Instruments

(TXN) - Get Report

trade at 51 times earnings.

Applied Micro Circuits

(AMCC)

has a multiple of 102 and

Microsoft

(MSFT) - Get Report

trades at 30 times earnings.

Turn Into Butter

"We maintain that even though tech has led us out of past recessions, this time is different because instead of too much demand chasing not enough capacity, there is too much capacity chasing not enough demand," Hill said.

Doug Cliggott, an analyst at J.P. Morgan, said the tech sector is under "enormous pressure" and that the recent strength won't be sustained into 2002. Aside from high valuations, Cliggott said the pricing environment remains weak, orders for computer equipment are growing more slowly than shipments and business purchases of hardware continue to fall. He added that growth in software spending is negative, while spending on computer and peripheral equipment has turned down relative to overall

gross domestic product. Global semiconductor sales are down 40% from last year and order growth for networking equipment has fallen sharply, he said.

Morgan's Galbraith said upward earnings revisions aren't "unfathomable" for the tech sector next year, but the group is unlikely to be rewarded for news that's simply not as bad as it could have been. He believes analysts' estimates actually need to rise for the move to continue into 2002.

But Brian Belski, chief fundamental analyst at US Bancorp Piper Jaffray, disagrees. He thinks 2002 probably will be known as the year of the turnaround, where earnings comparisons go from negative to less negative to eventually positive.

"Will the mathematical improvement of earnings comparisons now be construed as growth over the next several quarters?" he said. "Yes, we believe financial statement and management prudence and conservatism are currently driving the majority of earnings transitions."

If stocks do continue to rise and earnings remain depressed, P/Es would move up from their already lofty levels.

Still, analysts say this recession is shaping up to be the only one since 1960 in which labor productivity is expanding as the economy contracts, which should result in historically high profit margins going forward. While most agree that some sort of tech correction may be in order after such an amazing run, many feel that the longer-term prospects are brighter.

"The tech revolution is like the industrial revolution," said Don Hays, president of Hays Advisory Group. "People were buying everything in sight back then until the bubble burst. But that's when the really good industrial companies reaped their rewards. Those that survived became great companies over the next 20 years."

Of course, one thing won't change: Picking the winners from the losers still will be the toughest challenge tech investors face.