When IBM ( IBM) chief Sam Palmisano predicted at its annual meeting this week that the tech industry can keep out-revving the economy, he got lots of head nods. Despite persistently weak demand at the moment, pro stock-pickers, analysts and economists alike think tech can grow faster than the rest of the market.

But there's a growing consensus that it won't be by much, particularly for the hardware business. And with growth likely to be much tamer than in the past, some investors argue that the group's growth rate no longer justifies its price premium.

Even some tech leaders openly acknowledge those days are over. H-P ( HPQ) CEO Carly Fiorina has said the industry is likely to grow at a ratio of only one to two times GDP going forward.

For H-P, that means growth of 7% to 9% this year is likely, compared to a compounded annual sales growth rate of 13.2% between 1992 and 2002.

The leading trade group for the chip industry has said annual growth rates of 8% to 10% will be the norm going forward, compared to historic growth rates of around 15% or 16%.

The outlook for slower gains is a painful come-down for an industry that's grown at 4.4 times the rate of U.S. GDP over the past three decades. Between 1971 and 2001, information-processing equipment and software grew at a compound annual rate of 13.6% a year, based on figures reported by the government's Bureau of Economic Analysis.

The sector surged at an even faster clip in the '90s, at 14.4% a year.

Meanwhile, GDP crawled along at a humble 3.1%.

But assuming technology companies can no longer grow as fast as they used to, the logical takeaway is that investors shouldn't pay as high a multiple for stocks as they have over the past couple of decades. While software and services claim decent growth prospects, hardware and semi stocks, struggling with overcapacity and weak demand, are especially vulnerable to the downside.

Consider Intel ( INTC), which at a recent price of $18.60 trades at about 31 times fiscal 2003 earnings or 23 times fiscal '04 earnings.

To be sure, Intel has fallen far below its peak multiple of 69.5 times forward earnings reached in the boom years, as gauged by Lehman Brothers. But it continues to trade between the five-year low of 18.3 times and median of 28.5 times earnings -- a pretty robust valuation, considering earnings have plummeted 70% from their high.

"Maybe their P/E isn't as high as it once was, but the earnings growth rate is much lower," complains Lou Stanasolovich, president of Legend Financial Advisors, which has $140 million under management. "Ultimately, P/E and earnings growth rates have to equal over time."

There's no question the chipmaker's growth has slowed dramatically. Between 1982 and 2002, Intel's revenues grew at a compound annual clip of 18.5%. But in the past 10 years, it grew at a relatively slower pace of 16.4% a year, and in the past five, only 1.3% a year.

"We believe that investors should pay less on average going forward for Intel than they did historically," writes Sanford Bernstein Adam Parker in a research note, "primarily because the company has grown its revenue more slowly than the industry and because its gross margins will likely contract several hundred basis points peak to peak this cycle."

Intel is far from the only tech outfit that looks highly valued relative to its growth potential. Stanasolovich, who's keeping nearly half his firm's stock portfolios in cash because he can't find good values, cites Cisco ( CSCO) and eBay ( EBAY) as other examples.

"I think most people haven't gotten it still yet, that the stock market is still overvalued by any sense of history," he says. "Do I believe earnings growth rates will outpace the GDP? The answer is absolutely yes, but the stock price performance is going to have a rough time."

What Price Growth?

Indeed, with future growth rates at risk of being permanently ratcheted down, it's tougher than ever to figure out a fair price for tech shares. Complicating matters, stocks look extra pricey now because earnings are near a cyclical bottom. That makes P/Es appear all the more stretched.

"Is this a great point to dive into tech? Absolutely not," says Terence McCubbin, a vice president and stock analyst for Bethesda, Md.-based Chevy Chase Trust, which manages $372 million in assets.

As a case study in how confusing the outlook can be, he points to Applied Materials ( AMAT), the leading chip equipment vendor that's projected to earn a measly 13 cents this fiscal year.

With shares at around $15, the stock "looks awfully expensive," trading at better than 100 times earnings, notes McCubbin. But on a forward basis, it looks much more reasonable. Based on consensus estimates for 2004 and 2005, the stock trades at between 17 and 31 times forward earnings.

The trouble is, AMAT will have to more than triple its current earnings to reach the 2004 estimate and boost profit more than sixfold to attain the '05 estimate. Given the miserly mood among AMAT's chipmaker customers, it's not clear how quickly the company can do that. "It's your best guess whether it's cheap or dear," says McCubbin, whose firm last stocked up on AMAT shares at around $10 last fall.

To be sure, a few optimistic investors shrug off concerns about the potential for tech multiples to shrink in the long term. They argue the industry can still return to its historical growth rates, even if the heady gains of the late '90s are no longer possible.

Tom Telford, a co-manager on the $116 million ( ATCIX) American Century Technology fund, says emerging markets will help fuel tech growth, as countries graduate from agricultural to industrial to service economies. In America, that evolution has pushed technology, as a portion of capital expenditures, from 15% in 1960 to 45% in 2002. "As other countries make the transition, they will have similar growth trajectories as we've seen in the last 40 years," predicts Telford.

Another crucial ingredient will be the advent of some big new technology along the lines of the PC. "Everyone says there's no killer app yet. But at some point there will be," maintains Telford.

Yet with some of the biggest tech markets -- hardware and chips -- seemingly mired in slow-growth mode over the long term (excepting the occasional surge here and there), the broader industry's prospects certainly look less assured than in the past.

The bottom line: Looking out a few years, tech may still be able to outgrow the U.S. economy. But with ebbing growth, that's not all it's cracked up to be.