Morgan Stanley went scorched earth on technology Wednesday morning, downgrading several key sectors including semiconductor equipment because of expectations for a muted cyclical recovery and lackluster demand. In addition to the capital-equipment names, Morgan took shots at semiconductors, contract manufacturers of electronics, and the enterprise hardware space. The brokerage cited high valuations in lowering the chip-equipment sector to in line from attractive, although it also raised its price targets on companies including Applied Materials ( AMAT), Cymer ( CYMI), KLA-Tencor ( KLAC) and Novellus ( NVLS), citing the sector's 90% run-up since October. "Semiconductor capital spending plans for 2003 suggest that while a recovery is coming, it is likely to be muted. In addition, we don't believe the next cyclical peak can exceed the peak achieved in 2000," Morgan wrote. "We believe the stocks need to take a breather until fundamentals catch up or visibility improves on the pace of cyclical recovery." Contract electronics makers, known on Wall Street as electronic manufacturing services, were lowered to cautious from in line. Morgan Stanley says valuations in the group are "stretched" and risk remains to existing earnings estimates. "We expect consensus earnings estimates to trend lower in early 2003, particularly as end-market demand remains subdued and margin pressure remains from overcapacity and intense competition." The enterprise hardware sector was also dropped to cautious, while semiconductor makers were lowered to in line.