Economic storms see Tech Inc's invincible aura fading

Hopes are evaporating that top technology companies will offer a safe harbour this year from the economic storms swirling across Europe, Asia and the United States.

Investors should brace for some of the biggest names in software and hardware -- from Microsoft Corp and IBM to Intel Corp — to disappoint when Big Tech begins reporting numbers next week, analysts said.

Corporate IT budgets have historically proved more resilient to worsening macro-economic conditions than other kinds of spending, because businesses invest on the assumption that technology boosts productivity and helps save them costs over the long term.

But investors may have misjudged the depth of the European crisis, and with once-reliable-as-clockwork Chinese growth waning, demand in other emerging markets has not picked up enough of the slack.

The profit warnings could signal a broader pullback in orders, which means that Wall Street’s earnings projections now appear over-optimistic to some outside experts.

The one bright spot is Apple Inc, which still has many fans on Wall Street. The iPhone and iPad maker is one of the few major tech stocks to have gained in July, to the tune of 4 per cent.

Apple has beaten analysts’ earnings forecasts seven out of the past eight quarters by at least 12 per cent. Last quarter, it reported earnings 22.5 per cent above Wall Street estimates.

Its performance has propped up the entire sector and analysts expect a new iPhone this year to keep that up. Apple aside, market watchers expect the economic malaise will broadly hit technology companies in the second half of the year, even at firms that managed to squeak by in the second quarter and avoid issuing preliminary earnings warnings.

Over the past three months, analysts have largely held on to their second-quarter earnings forecasts for technology and telecommunications companies, while cutting estimates in other sectors. Now many may have to make up for that oversight. An IDC survey of Chief Information Officers (CIOs) at about 250 US companies conducted two weeks ago found, on average, that they expected their budgets to decrease for the first time since early 2009.

Analysts currently forecast companies in the S&P 500 Index will report profit growth of 5.8 per cent in the second quarter, with technology earnings growing at 7.9 per cent, according to Thomson Reuters data.

They are more optimistic about prospects for the second half and that's where some expect cuts to come.

Analysts forecast third-quarter earnings growth of 12.9 per cent for the S&P 500’s technology index and fourth-quarter growth of 14.9 per cent.

Companies at risk in the second half include services giant IBM, Intel, as well as software makers including Microsoft and VMware Inc, analysts said.

It’s not a surprise to some that sentiment has shifted so quickly. Historically when businesses have frozen or cut technology budgets, they have sometimes done so suddenly, taking tech companies and Wall Street by surprise. That process appears to have begun.