Wall Street is acting otherwise, but the tech upturn isn't over yet for chip equipment makers, according to Semiconductor Equipment and Materials International, or SEMI. Amid an industry-wide selloff Monday, the chip equipment trade group said its members don't expect industry growth to top out until around the second quarter of 2005.

The trade group's findings, part of a midyear forecast issued at the annual SEMICON West chip equipment conference, should provide some solace for beleaguered bulls -- those who say the current growth cycle still has plenty of oomph. But as the first week of earnings season beckons, the debate has been dominated by pessimists who argue the chip industry will hit tough year-over-year growth comparisons in the second half of 2004.

On Monday, for example, investors were ditching chip and chip equipment stocks after Merrill Lynch dished out two downgrades, dropping its rating on the chip industry from overweight to underweight and nudging down its equipment industry rating from overweight to neutral.

The brokerage giant is fairly sunny on the near-term forecast for chip equipment makers, saying the second-quarter reporting season could actually lead to some upward estimate revisions for the second half of the year. But heading into 2005, such upside will become much harder to find, Merrill concluded.

Reacting to the downgrade, the benchmark Philadelphia Stock Exchange Semiconductor Index was recently off 3.4%, while Intel ( INTC) (which Merrill downgraded to neutral from buy) was recently down 70 cents, or 2.6%, to $25.88 and Applied Materials ( AMAT) was off 71 cents, or 3.8%, to $17.94. Other equipment names down on the news included KLA-Tencor ( KLAC) and ASML Holdings ( ASML).

The Merrill downgrade came just as influential equipment play Novellus ( NVLS) kicked off the chip earnings season with solid results . While management said repeatedly on a conference call that the company has seen no hint of a slowdown yet, it wasn't enough to appease nervous investors: Novellus shares were recently off $1.62, or 5.2%, to $29.42.

Banc of America analyst Mark FitzGerald noted that September order growth for Novellus, excluding an acquisition, is forecast at 0% to 5%, below his estimate of 7%. (He has a neutral rating on the shares; his firm has recently done investment banking for Novellus.)

In an interesting twist, the Semiconductor Equipment and Materials International's upbeat view was basically endorsed by Merrill, which predicted orders and revenue for the sector could peak in the first half of 2005.

But while the two sides agree on the likely shape and timing of the semiconductor cycle, they dispute the magnitude of industry growth.

SEMI expects sales to jump a robust 63% this year to $36.2 billion, with revenue growth tapering off to a still-healthy 24% in 2005.

But Merrill Lynch was less optimistic, estimating that the typical chip equipment outfit will see growth rates of 49% in 2004 but just 14% in 2005.