The best chip-equipment investing strategy: Hold off.

Like perennially disappointed Chicago Cubs fans, chip-equipment investors are being asked to wait until next year. Much later next year.

The outlook for companies that make semiconductor capital equipment has worsened over the last month or two. Now analysts are starting to talk about the second half of next year as the time for a pickup.

Not so long ago, this year's second half was supposed to host a recovery for chip-equipment outfits, as demand for semiconductors was on the upswing. As recently as last month, a leading trade group known as SEMI predicted that the market for semiconductor equipment would grow 29% in 2003. But the recovery seems to have hit a plateau, causing chipmakers to tighten their wallets.

In a report out Monday, Banc of America predicted Intel ( INTC) will end up shrinking its capital expenditures next year to $4 billion, down from the $5 billion to $5.3 billion it will likely spend this year -- and painfully below the fat and happy $7.3 billion it shelled out in 2001.

Analyst Mark Fitzgerald predicts that 2003 capital spending will grow 7.1% over the current year, down from earlier projections that had it rising as much as 20%. "If we are correct, then the recovery will be the most protracted and modest recovery in the industry's history," he wrote in a research note.

On top of cuts in capex budgets, some of the biggest clients of equipment makers are also delaying deliveries of new tools. Leading foundries Taiwan Semiconductor ( TSM) and United Microelectronics ( UMC) are reported to be pushing out deliveries from the second half of 2002 to next year.

"We continue to believe 2003 will be the year of 300 mm," said a Deutsche Bank report, referring to a manufacturing technology that helps semiconductor companies make chips more efficiently and cheaply. "The problem is that it will likely be in the second half."

In the near term, profits at Novellus ( NVLS) and Lam Research ( LRCX) are bound to suffer, said Monday's research note from Banc of America. The report contends that budget cuts at leading foundries TSMC and UMC will hurt the equipment suppliers as early as the September quarter, lasting through 2003.

After cutting earnings estimates, Banc of America now expects Novellus to post profits of 32 cents a share in the 2003 calendar year, far below the 99-cent consensus estimate, according to Thomson Financial/First Call. The investment bank forecasts earnings per share of 30 cents at Lam, compared with Street expectations for 44 cents.

A Likely Third-Quarter Letdown

The upshot: There's reason to expect the news from equipment suppliers will get worse before it gets better. "Although clearly too early to say for sure, checks throughout the food chain suggest continued deterioration in forecasts provided by large equipment companies for the fourth quarter," said a note by Deutsche Bank analyst Timothy Arcuri. Plus, he thinks many companies could miss their order guidance when they report in October.

In light of those trends, Street expectations for revenue growth next year look too optimistic, Arcuri believes. Currently, analysts are expecting sequential sales growth of 6% in the first quarter of 2002, then 8% in each of the two following quarters.

Though sales forecasts seem destined to get a haircut, don't be surprised if equipment stocks stage a rally or two. The shares sometimes trade up in the fall in sympathy with chipmakers, which typically enjoy a seasonal boost in sales based on back-to-school and Christmas-related demand. Also, some investors will be hard-put to resist the lure of bargain-bin valuations in the equipment sector.

But that doesn't change the feeble outlook, says Fitzgerald. "The stocks can really from their recent lows as valuations, especially relative to the market, are reasonable. But we think rallies will eventually stall because of the lack of earnings power in the group."

Investors trying to get a fix on the near-term outlook will have a better sense after Novellus offers its mid-quarter update on Aug. 29.

In July, the company was the first of the big equipment makers to acknowledge that orders could drop as much as 10% in the quarter that's under way. Back then, many analysts were still expecting bookings to be flat to up 10%.