There are weeks when Wall Street looks for an excuse to buy. And then there are weeks when it can't wait to sell.

Tech stocks suffered a drubbing this week despite some very strong numbers from stalwarts Apple ( AAPL) and IBM ( IBM), and the price of oil went skidding to the $50-a-barrel range.

Even the normally sunny Jane Snorek of U.S. Bancorp Asset Management had to look hard for reassuring news. "Stocks have gone up for six months," she said. "Now we're getting some lackluster quarters. That's not a good combination."

Not a good combination is right. On Thursday, the Nasdaq lost 1.5%, its fourth-worst performance in the last six months. Since last Friday, the tech-heavy index has shed 2.1%.

Apple, for example, beat first-quarter earnings expectations by 36 cents a share, grew sales by nearly 25% and sold an astonishing number of iPods. Sure, guidance for the second quarter wasn't great, but everyone who follows the stock knows that Apple typically low-balls its projections. The reward? Shares have slipped more than 8% since Tuesday's close of $97.10.

IBM's case wasn't quite as clear cut, but in a tech bull market, a company that grew software sales by 14%, services by 6% and bookings by 50% would get some love. Not this week.

"No amount of good news seemed enough to offset the bearish mood about tech stocks set off by Intel's ( INTC) disappointing earnings report two days ago. Just as a rising tide lifts most boats on Wall Street, so does the ebb tide drop them," said Annex Research analyst Bob Djurdjevic.

Or consider the stutter-stepping in a note by Goldman Sachs hardware analyst Laura Conigliaro, who raised her 2007 earnings estimate on IBM, kept her price target at 107 and then damned the company with very faint praise: "The IBM earnings stew somehow managed to mix together an even more varied combination of strengths, disappointments, and confusion than usual.

"While the quarter, and its implications for future growth, was strong and better-balanced than we've seen in over a year, unexpected investments in sales and incremental acquisition expense yielded gross margins that were lower than last year's December quarter in all three of IBM key segments (software, services, hardware)," she said in a note to clients. Goldman has an investment banking relationship with IBM.

Fair enough. But is it right to fault an acquisition strategy that has turned software from a lumbering elephant to Big Blue's largest driver of profits?

Reasons to Worry

Behind the pessimism is increasing doubt that the Federal Reserve will move to cut interest rates any time soon. "Without a cut you won't see multiples expand in sensitive stocks like technology and retail," Snorek said.

Also, a slowdown in telecom, whose business ripples throughout the technology food chain, has fund managers very worried. "Just look at the large percentage that communications contributes to many technology companies. It's a significant problem, and I'm surprised the market hasn't pulled back even more," says Pat Becker Jr. of Becker Asset Management.

"Don't think it's just the handset and hardware makers who suffer when telco tanks. Standard & Poor's, for example, has a strong sell on Verisign ( VRSN), which derives more than half of its revenue from communications," says Scott Kessler, the head of S&P's technology equity research.

What's more, IT spending by large businesses, which grew by an estimated 6% during 2006, is expected to slow to 2.8% this year, according to Gartner, a market research and IT consulting firm. Earlier in the year, Gartner figured that spending in 2007 would match the previous year's pace, but analysts reduced their estimates in late December.

Enterprises will be spending more on nondiscretionary "run-the-business" items such as rising energy costs and stiffer regulatory requirements, so they'll have less money left for new strategic technology investments, says Jed Rubin, director of Gartner Consulting.

It's worth noting that the earnings season is still very young. Only about 15% of the S&P 500 has reported, including 14 of 76 tech vendors.

There is, though, an unsettling statistic compiled by AG Edwards analyst Gary Mobley. He found that of the 72 semiconductor companies that gave guidance for the December quarter, just three of the 24 that updated their outlook had boosted guidance, while 15 lowered guidance and six companies stood pat.

Meanwhile, shares of those companies, as measured by the Philadelphia Semiconductor Index, have appreciated by 18% in six months. "I guarantee you that business isn't 18% better," said one fund manager with big positions in the sector, who asked to remain anonymous.

Brightening the outlook a bit are expectations that Microsoft ( MSFT) will report a strong quarter next Thursday, and sentiment that the huge amounts of cash still sitting in the hands of private-equity firms will continue to support the market.

S&P's Kessler notes that the cost of options, which acted as a lead weight on earnings comparisons in 2006, will be normalized in 2007. Although cautious, Kessler says that fundamentals in tech are still reasonably strong, companies are generating a lot of cash, and he expects earnings to increase by an average of 20% during the year.

Even so, it was a very tough week, with the prospect of more pain to come.

TechWeek Scorecard
Index Closing Change
Nasdaq Composite 2451 -2.1%
Philadelphia Semiconductor 458 -5.2%
Goldman Sachs Software 183 -2.7%
TSC Internet 248 -2.7%

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