Earnings season has mainly served up contradictory clues to the economy's second-half outlook, giving investors all the more reason to home in on Thursday's postclose results from IBM ( IBM).

So far, General Electric ( GE), Novellus ( NVLS) and even Intel ( NVLS) have reported seeing steady demand. But Yahoo!'s ( YHOO) disappointing guidance and a slew of earnings warnings from Veritas ( VRTS), PeopleSoft ( PSFT) and others have sent tech shareholders jogging for the exits.

At Big Blue, management has talked up prospects for increased corporate spending for the past two quarters. In April, then-chief financial officer John Joyce (since named to head up the company's services arm) said customer infrastructure was the oldest it's been in nearly two decades, hinting buying would soon accelerate.

But IBM has yet to show proof the widely anticipated corporate spending pickup has arrived, and the early chatter suggests the company won't be any more persuasive Thursday.

While Wall Street was betting earlier this year that strengthening global business profits would end up translating to IBM's bottom line, analysts have lately cooled on that theme. At this point, few expect much in the way of positive surprises. Still, IBM should at least meet the consensus estimate for $1.12 in earnings per share on revenue of $23.35 billion; that sales level implies growth of 8% vs. last year's $21.6 billion, or around 4% adjusted for currency fluctuations.

Even the Bulls Are Cautious

It's a measure of Wall Street's humdrum expectations that Morgan Stanley analyst Rebecca Runkle, who on Tuesday upgraded IBM from equal weight to overweight, also said consensus numbers on the stock may be revised down after the June quarter report. "The current quarter is not central to our upgrade," Runkle wrote.

IBM may not be able to meet its long-term guidance for high single-digit revenue growth and low double-digit EPS growth, Runkle said, citing the potential for "a meaningful slowdown in IT spending over the next several quarters."

Still, she thinks Big Blue will outperform tech peers, with its broad portfolio and deep balance sheet, making it a smart defensive play in what could be a tricky second half of the year.

In a similar vein, Michael Holland, who owns IBM in the ( HOLBX) Holland Balanced fund, compared IBM to GE, saying "it performs as well as possible given whatever the prevailing economic circumstances are, because of their above-average management."

He thinks IBM shares -- down 8% year to date vs. the S&P 500's flat performance -- have been unfairly bid down. "This is a glass-half-empty environment for tech companies," Holland said. "IBM, along with a lot of the tech group, has been a laggard in terms of how it's acted relative to the earnings performance."

But others on Wall Street are more standoffish.

Fulcrum Global Partner's Robert Cihra estimates that recurring and annuitylike revenue streams from maintenance, outsourcing, host software, financing, and intellectual property will kick in about 40% of IBM's second-quarter revenues, or two-thirds of its profit. While giving IBM credit for its stable revenue, Cihra is neutral on the shares, arguing that Dell ( DELL) and Hewlett-Packard ( HPQ) offer better growth and valuation upside.

Skeptics point to near-term worries that could undermine IBM's results. Though the company has shown impressive hardware market share gains, its stock price has slid toward cheaper levels as concerns center on the level of demand in its flagship services arm, ongoing difficulties in its semiconductor division and potential weakness in software.

  • IBM's services signings, a key indicator of customers' willingness to spend, seem on pace to underwhelm at around $10 billion or $11 billion, compared to $10.7 billion for the same quarter in 2003. (IBM could show progress in improving profit levels in the division, which have slipped from an average of 11.7% in 2002 to 8.9% in the first quarter of 2004).
  • Analysts expects IBM's chip division -- always a swing factor in earnings -- to move toward profitability after five quarters of losses. But the shift will be helped by easy comparisons and a $200 million payment for embedded chip technologies from Applied Micro Circuits (AMCC) in April. The chip business is still perceived as a drag on the stock.

    "Although IBM continues to assert yields are improving -- slowly but surely -- our checks with various customers and the channel suggest only minimal progress," said Joel Wagonfeld of First Albany. "As a result, this remains one of our biggest concerns, especially given the disproportionate leverage in this business as a result of its high fixed costs."
  • Another worry is that the handful of software earnings warnings could foreshadow trouble for IBM's software line, though several analysts cast doubt on that theory. Wagonfeld wrote that "IBM's software mix is quite diverse, with much of it coming from segments that would not be as susceptible to end-of-quarter negotiations."

    At Morgan Stanley, Rebecca Runkle noted that SAP (SAP), a reasonable point of comparison and a partner of IBM, actually preannounced revenue to the upside.
  • In short, IBM isn't likely to deliver the definitive statement on an IT upturn that Wall Street had hoped for over the past couple quarters.