Barely a week into the New Year, telecom watchers have mixed feelings about the arrival of their long-awaited catch-up rally.

To much fanfare, shares of

Nortel

(NT)

have jumped 40% and

Lucent

(LU)

36% in the opening days of 2004. Other big players in the beaten-down communications-equipment sector have recently picked up the march as well.

Sparking the revival have been

Nokia's

(NOK) - Get Report

strong comments and big customer

Verizon's

(VZ) - Get Report

rollout of $3 billion worth of network upgrades.

The sectorwide spike comes after these stocks mostly sat out what turned into a smoking 2003 rebound for the tech sector. Now, though, investors who had been rooting for just such a telecom bounceback find themselves harboring two fears: On the one hand, they worry that the New Year rally has all the makings of a minibubble echoing the 2000-01 industry collapse. On the other hand, they hate to think about missing out on all the fun.

"It's nuts," says Stuart Conrad of Atlanta-based hedge fund 3 Squared Capital Partners. "Sure, you can argue some fundamentals are creeping up, but people are acting like it's the '90s again."

Fundamental Questions

What gives? Well, take a look at the action in Nortel. Yes, the Ontario-based gear giant will be one of the key suppliers to Verizon, giving it a clear shot at hundreds of millions of dollars' worth of orders. But, considering the ills still afflicting big telecom service providers, industry observers have been more than a little surprised to see the news add $5.6 billion to the company's market value.

Indeed, Verizon's upgrade plans aside, there's little evidence that the big phone companies have the wherewithal to start buying a lot of gear any time soon.

SBC

(SBC)

,

AT&T

(T) - Get Report

and others are starting whole new rounds of job cuts trying to adjust expenses to still-falling sales levels.

Analysts and investors say that until revenue starts growing, there simply won't be across-the-board increases in network-expansion spending.

In fact, the outlook for some of the Bells appears even grimmer lately, as customers bolt to lower-cost rivals. Not to mention that new technologies such as in voice on the Net threaten to undermine the conventional phone business.

Highlighting that theme Friday, Merrill Lynch analyst Adam Quinton downgraded SBC to sell, citing pressure on growth and profits for the San Antonio phone giant.

"In our view, growth prospects at SBC, and of course the other RBOCs, remain challenged," wrote Quinton in a research note Friday.

High-Wire Act

But clearly not all phone companies are fading. Wireless services like

Nextel

(NXTL)

, Verizon Wireless and even

Sprint PCS

(PCS)

have been able to substantially increase their subscriber rolls in the past year, and simultaneously mend their debt-heavy balance sheets.

Of course, the penny pinching on hardware certainly helped improve these outfits' financial performance. But what's good for buyers isn't necessarily good for sellers. The slowdown in network-equipment orders has helped squeeze infrastructure suppliers like

Ericsson

(ERICY)

, Nokia and

Motorola

(MOT)

dramatically the past two years.

Now, the sudden reversal. Ericsson and Nokia shares jumped 14% and 13% respectively Thursday. Both companies continued that trend Friday. Ericsson was up 4% to $22 and Nokia was up 2% to $21 in midday trading.

"People have been trashing wireless spending for so long," says 3 Squared's Conrad, who has been trading in and out of Nortel lately. Now that Verizon plans to spend more on wireless-data gear, and Nokia has predicted a strong fourth quarter in networking-equipment sales, "I think finally they have a little something to cling to."

Larger trends -- an arguably improving economy, last year's broad stock market revival and diminishing fear of terror attacks -- have helped buoy spirits on the Street.

Still, the rally in tech stocks, particularly telecom-equipment makers, implies a tremendous sustained growth rate -- oddly enough, one very much akin to the thesis that fed the great telecom boom of the late '90s. And as we all saw, those assumptions proved painfully wrong.

But for investors this time around, it seems difficult to heed those kinds of caveat when the getting is so good.

"The market is based on fear and greed," says hedge fund manager Conrad. "There's been a lot of greed lately, and now the rest have a fear of being left behind."