Tech sector Q2 earns seen strong but caution prevails

SAN FRANCISCO (Reuters) - The U.S. technology sector kicks off a closely watched earnings season next week with investors expecting global names like Intel (INTC.O), IBM (IBM.N) and EMC (EMC.N) to take center stage.

The coming weeks will offer a pivotal mid-year progress report for U.S. tech companies, as investors who fueled this year's rally in IT stocks watch to see if the industry can live up to expectations of leading a corporate earnings recovery.

If the spring earnings season was focused on finding a bottom in the tech sector, Wall Street will look to July's numbers to see what progress has been made off those lows.

Expectations are for rosier earnings. But although analysts expect second-quarter results to be generally stronger than the dismal numbers of the first quarter, demand -- particularly on the enterprise side -- remains a concern.

"The real question is whether the improvement in business that we're seeing: is that a catch-up from the past six to 12 months of underspend ..., or is it real true secular demand?" said Broadpoint Amtech analyst Brian Marshall.

Investors get a snapshot next week of the sector's health, as bellwethers Intel, IBM and Google Inc (GOOG.O) report. The following week brings Microsoft Corp (MSFT.O), Apple Inc (AAPL.O), EMC and Texas Instruments TXN.N.

"Intel is going to set a good note, a positive note for the earnings season," said Tristan Gerra, a chip analyst with Robert W. Baird. Overall, "Q2 in our view is tracking well, in-line or above expectations, so we wouldn't be surprised if there are a number of companies beating guidance."

Avi Cohen, managing partner of Avian Securities, expects large enterprise companies such as IBM, EMC and NetApp (NTAP.O) to show improvement, as business activity picks up. But he was more skeptical about consumer technology companies -- outside of big-name brands like Apple.

SUMMER BOOST?

Analysts say if tech results are solid as expected, there could be life left to the tech rally. The Morgan Stanley High-Technology Index .MSH is up around 25 percent this year, although it has come down from its June high.

But amid the optimistic expectations for earnings season, analysts caution that it is far too early to claim a recovery is underway. "Green shoots" aside, signs of weakness persist.

Analysts say retailers, reeling from their worst Christmas sales season in decades, may face a gloomy few months ahead with home prices falling, credit tight, and the jobless rate expected to climb.

"Right now everybody is building for back-to-school, they're building for second-half demand, whether it shows up or not is the question," Cohen said.

Intel said in April the PC market had bottomed out, although Microsoft and PC heavyweights Hewlett-Packard (HPQ.N) and Dell Inc (DELL.O) failed to echo that sentiment.

iSuppli on Wednesday became the latest research house to cut its outlook for 2009, trimming an already grim forecast for semiconductor and electronic equipment revenue. Although iSuppli does expect the second-half to show improvement, it noted there was "little visibility into future demand trends."

Wall Street will be listening very closely to management commentary around outlook. Some analysts see potential catalysts on the horizon.

Microsoft is set to launch Windows 7 in October, potentially giving a boost to a hungry tech food chain, said Endpoint Technologies analyst Roger Kay.

"The supply chain has to start moving for October in August, so you'd see silicon sales and other sales start to climb from July," he said. "So you're going to see a healthy bump in shipments in August and then September as well."

Investors will also be watching to see how the simmering rivalry between Microsoft and Google affects the PC market. After Microsoft ventured onto Google's turf with its Bing search engine, Google responded with a new operating system it hopes will challenge the Windows juggernaut.

The smartphone sector continues to sizzle. The contest between Research in Motion Ltd's (RIM.TO) BlackBerry and Apple's iPhone will only get more interesting with the addition of Palm Inc PALM.O and the Pre.

And merger activity is expected to escalate in coming months, with Oracle Corp's (ORCL.O) deal for Sun Microsystems JAVA.O and EMC's play for Data Domain Inc DDUP.O only the opening salvos in what Broadpoint's Marshall predicted could be the "golden age of technology M&A."

(Reporting by Gabriel Madway; additional reporting by Clare Baldwin; Editing by Edwin Chan, Bernard Orr)