In the wake of dismal midquarter updates from leading hardware maker Sun ( SUNW) and chip-equipment supplier Novellus ( NVLS), Wall Street analysts issued a rash of pessimistic notes on the technology sector. Yesterday's
comments from Sun -- in which the company lamented that the tech environment may be worsening -- were "more somber than expected," wrote Bear Stearns analyst Andy Neff, who has a neutral rating on the stock. The nasty spending environment is only one of the server maker's headaches, he observed in a research note. "Sun is facing an intense competitive environment on every front: commodity Wintel/Lintel solutions creeping up from below and a more aggressive competitive environment in UNIX from IBM and HP," he said. Meanwhile, noting the extent of Sun's macroeconomic troubles, he raised the prospect of further downward guidance at yet another tech stalwart: IBM ( IBM). "With the commentary from Sun and H-P ( HPQ) on continued soft demand and aggressive pricing environment, we are concerned about the near-term outlook for IBM, given its exposure to hardware and given the lack of announcements on any major services contract signings to date," he said. While Sun and IBM have been bedeviled by the well-known lack of corporate spending, that isn't the only complaint in techland these days. The latest worry is that consumers, too, have grown more miserly. Thursday, chip-equipment supplier Novellus said likely bookings declines of up to 28% were due not just to weak business spending but also to softening consumer buying. That follows comments from H-P, which said in an earnings call this week that consumer demand had been weaker than expected. Chip prices could be further weighed down if consumer sales stay weak in the fourth quarter, noted UBS Warburg analyst Byron Walker, adding that recent earnings disappointments at retail shops Best Buy and RadioShack aren't an encouraging sign. A sluggish pricing environment would have a knock-on effect for capital equipment suppliers, he explained. "Semiconductor pricing was, and remains, exceptionally poor, a function of overcapacity. Should unit demand slow, semiconductor revenues will follow suit given the absence of pricing power. Slowing semiconductor revenues equate to slowing semiconductor cash flows, the fuel for capex," he said in a research note issued Thursday in which he downgraded Novellus and Lam Research ( LRCX). Banc of America analyst Mark FitzGerald seconded that concern. Though he said Novellus' downward guidance wasn't as steep as the more pessimistic Street views, he's hardly optimistic, predicting that "industry fundamentals will stall for the next three to four quarters." Today, Merrill Lynch threw its lot in with the bears, too, with downgrades on a quartet of leading chip-equipment suppliers. The bank reduced its buy ratings to neutral for Novellus, Applied Materials ( AMAT), KLA-Tencor ( KLAC) and Lam Research. "We believe the lower demand will result in estimate reductions with potentially declining revenue and earnings over the next several quarters, although it is difficult to judge extent at this point," wrote analyst Michael Ramirez. In midafternoon trading Friday, tech stocks were mostly down after digesting the news. Sun was off 1.8%, or 7 cents, to $3.76. H-P was off 3.3%, or 46 cents, to $13.37, while IBM had lost 1.2%, or 92 cents, to $75.70. Novellus was trading up 1.2%, or 30 cents, to $24.59, while AMAT also was up 1.4%, or 19 cents, to $13.63. Meanwhile, KLAC was off 1.6%, or 53 cents, to $33.09, and Lam was down 2.5%, or 30 cents, to $11.65.