Demand for telecommunications equipment is growing furiously, so gear makers will post impressive earnings gains in coming weeks. But tech investors' sudden vertigo means that even strong reports aren't likely to right the dizzy sector.

The fundamental strength of the equipment sector helped drive the

Nasdaq

to a surreal 86% gain last year. Big gear makers such as

Cisco

(CSCO) - Get Report

,

Ciena

(CIEN) - Get Report

and

Nortel

(NT)

rallied to all-time highs early in 2000 as investors continued to heed the call of the Internet.

But the herd is now beating a swift retreat, knocking billions of dollars out of those lofty valuations. And just as last year's telecom run-up lifted the shares of companies both strong and weak, the selloff is now knocking these stocks down

en masse

, suggesting a continuing disconnect between fundamental performance and day-to-day stock action.

The culprits: nerve-racking valuations and the urge to cash out.

Red in the Cheeks

The first-quarter earnings season, due to start in earnest next week, should show the sector in ruddy good health. Nortel, which is set to report April 25, is expected to post a 33% increase in profits from the same quarter a year ago. Cisco, scheduled to report May 9, should post a 38% jump from a year earlier.

"There is zero sign of demand drying up," says

Lehman Brothers

telecom equipment analyst Steven Levy. "I have never seen conditions for demand of telecom equipment as strong as it is today."

All the same, the Nasdaq is some 20% off its all-time highs of last month in a retreat that owes nothing to the fundamentals of the telecommunications industry, says Levy. Instead, the selloff is driven by "companies selling at 100 times revenues and people getting nervous about that."

Most telecom investors made a fortune last year and early this year, and even if the outlook is still bright for these companies, no one seems willing to watch all those gains vanish, says David Toung, an analyst with

Argus Research

. "They are probably getting nervous and want to take their profits while they can," says Toung. "And I think maybe valuations are coming into play."

Ciena, valued at $15.8 billion, boasts a rather rich

price-to-earnings ratio of 4346 for the last 12 months, according to

Market Guide

. The stock is already 41% off its March high of 189. Cisco, with the nation's biggest market valuation, $503.4 billion, offers a price-to-earnings ratio of 202. Cisco shares have fallen 13% since they hit an all-time high last month of 82.

God in the Details

A few individual cases illustrate how little individual earnings reports mean to investors right about now. For one, French telecom equipment maker

Alcatel

(ALA)

this weekend forecast a stronger-than-expected jump in revenue, citing strong demand. But Alcatel's stock dropped Monday as the Nasdaq suffered a 5.8% drop that featured a double-digit decline in Ciena and 5% selloffs in many of the sector's big names.

Meanwhile,

Tellabs

(TLAB)

last Thursday cited component shortages, among other things, in warning of an earnings shortfall. The stock opened sharply lower, as might have been expected. But then investors resumed buying Tellabs shares amid a rally in the tech sector, and the stock finished the day only moderately lower.

One stock to watch during the coming period is

Lucent

(LU)

. Lucent stock gave up a third of its value in January following a high-profile

warning, in which the company conceded it had failed to keep up with demand. Despite attempts to juice up the stock with a

spinoff of its slow-growing office network business, Lucent shares remain near their doldrums of early this year, well off their highs. It may well be the one telecom stock that won't move with the pack for now.