Updated from 11:52 a.m. EST.

For a market wowed by third-quarter spending on technology, the news just got even better.

On Tuesday, the Commerce Department said spending on computer equipment and software grew a stunning 18.4% in the period, even better than the 15.4% rate it had initially reported.

But money managers don't view the blowout numbers as a reason to load up on tech stocks -- at least not the usual clique of big-caps like

IBM

(IBM) - Get Report

and

Dell

(DELL) - Get Report

. Some are shying away from hardware names altogether, saying the names look too expensive, especially against a backdrop of what they view as unrealistic expectations.

Most software stocks aren't quite so overpriced, in part because the leading names haven't yet seen the strong recovery enjoyed by their hardware counterparts.

On Tuesday, the Merrill Lynch High-Tech 100 was virtually unchanged despite the GDP report but was up 0.5% Wednesday afternoon. The index, a proxy for the biggest tech companies, is up nearly 66% year-to-date. Software trails far behind, with the Goldman Sachs Software Index up 37% year-to-date.

Such heady performance has generated a sense of caution among some investors despite robust results from the semiconductor industry's leading lights. In October, Intel reported the best third-quarter growth in more than 25 years, while chip-equipment outfits

Applied Materials

(AMAT) - Get Report

and

Novellus Systems

(NVLS)

expect orders to surge by at least 20% in the quarter under way.

Yet instead of focusing on upward momentum, investors are focused on price. And on that count, skeptics say some of the bigger tech names look dubious.

"The economy's actually getting better, no doubt about that," said Jerome Dodson, manager of the $294 million

Parnassus Fund

. "But tech stocks have run up quite a bit, much more so than spending has, so that's really a concern."

Applied Materials now trades at around 167 times the last 12 months' earnings, Dodson notes.

Analysts likewise say valuations are high: A note from Sanford Bernstein tech strategist Vadim Zlotnikov observed that just above 50% of tech stocks trade at more than two times the broader market's price-to-earnings valuation, based on calendar 2004 earnings expectations. That matches the levels seen at the peak of the bubble.

Zlotnikov recommends that investors keep a market weighting in tech, given the sector's strong fundamentals and potential margin upside.

But Dodson has grown so leery on valuations that he's pushed 85% of his portfolio into cash -- the highest cash allocation the firm has had in its 19 years of existence.

Gearing up for a market correction, he sold all his tech holdings last summer, including names like Applied,

Cisco

(CSCO) - Get Report

, Intel and Novellus.

Other fund managers are less concerned about a sharp market correction but still sound less than enthusiastic on most tech names.

At Transamerica Funds, portfolio manager Chris Bonavico says recent tech-spending growth doesn't necessarily reflect a surge in underlying demand, but stems partly from outside factors. He points out that the sharp spending growth looks so strong in part because business has until recently been weak.

Indeed, though hardware outfits have started to see healthy growth, some software vendors are still struggling to post year-over-year top-line gains.

"Many companies are still not convinced they are seeing a pickup in spending, although the environment is widely viewed as firming up and interest levels are recovering," observed Goldman Sachs software analyst Rick Sherlund Sherlund in a note last week.

But weak comparisons are not the only outside factor that has goosed the growth rate. Even more important, says Bonavico, is the short-lived corporate tax break that went into effect last summer.

The legislative change quadrupled the annual corporate deduction allowed on purchases of computers and software, to $100,000. But the tax break sunsets after 2004.

"I think it means that through the rest of '04 we will see an artificial boost; it's basically giving

corporate buyers a price cut," says Bonavico. "That effectively is going to pull economic activity from '05 and beyond into

the period between now and the end of '04."

Bonavico has only minimal tech stakes in the two funds he co-manages, the $96 million

Premier Growth Opportunities

fund and the $88 million

Premier Focus

fund. Like Dodson, he believes most names are too pricey in light of the risks. Among the few stocks he owns are

Qualcomm

(QCOM) - Get Report

and

Microsoft

(MSFT) - Get Report

.

Finally, some market players say they're steering clear of big tech names not because they fear a market slide, but simply because they don't see much upside in stock prices.

Michael Mahoney, managing director at hedge fund EGM Capital, prefers to play a recovery by focusing on better-priced small- and mid-cap tech names that tend not to have a big Wall Street following. Among his current investments are

Advanced Digital Information

(ADIC)

,

Lexar Media

(LEXR)

and

Credence

(CMOS)

.

Though he shies away from tech's biggest names, Mahoney is relatively upbeat on the industry's prospects. He believes the growth rate of tech spending actually could prove to be more sustainable than the growth of overall GDP, citing the apparent beginnings of a pickup in corporate spending.

"Businesses have sat out whole product cycles at this point -- and in some cases, you could argue, two product cycles. All of that argues you're going to have better

fourth-quarter numbers for most hardware and software companies than are built into the models right now," he says.

"A lot of these companies are still coming off a rebound of a disastrous cave-in in tech spending," agrees Joe Veranth, an executive vice president and portfolio manager at Brookfield, Wisc.-based Dana Investment. "They're still trying to grow revenue."

Veranth, whose firm manages $2 billion, believes many tech companies are still at the beginning of a turnaround. "The highest profitability point for these companies will come later in the cycle," he said.

Gearing up for a rebound in software, Sherlund moved to an attractive coverage view of software in early September. He thinks investors could start to shift from semiconductors into software if the software sector starts to show convincing improvements in sales and earnings.

But given the continued softness in software and high prices in hardware stocks, some wary investors are still steering clear of leading tech names.