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Why Investors Should Still Consider Tech

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Market strategists warn of a correction but outline the long term case for the sector.

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Tech shares have been on a tear the past six months, with the Nasdaq up over 36% compared to the S&P 500's 28% rise. So is now the time to get back into tech or did investors miss their chance?

It may be best suited for investors who can stomach a little short-term pain for a long-term gain.

The technology market looks to be in better shape than many other industries and, although market strategists do warn of a correction ahead, they continue to outline the long-term bullish case for makers of chips, computers and software.

With just a handful of companies left to report, second-quarter earnings for companies in the S&P 500 are forecast to be down 28% on average from the year-ago period, according to number crunchers at Thomson Reuters. In contrast, earnings for technology companies are predicted to fall by 20%. Looking ahead, analysts have raised their forecasts for the industry. Tech earnings are expected to be down 17% in the third-quarter, while earnings for the S&P 500 are estimated to decline by 21%.

This week, the tech sector has continued to take headlines, with Hewlett-Packard (HPQ) saying that it's now seeing a "stabilized market" and implying that tech spending has hit bottom. This tracks comments from head honchos at Cisco (CSCO), who said earlier this month that they saw positive signs in the economy and their business. In addition, the latest data from July indicates North American semiconductor equipment firms had more orders than they could deliver.

But tougher times could lie ahead: we have moved very hard and fast off the bear market low in early March, and, more ominously, summer is now ending. Although nobody can explain why, September is the worst month for stocks.

A market correction would be particularly tough for the highly volatile tech sector, warns Sam Stovall, chief investment strategist at Standard & Poor's. "Tech is a cyclical place you traditionally want to be in beginning of a new bull market, but prices have moved up a little too quickly," Stovall says. "We think investors will start to attempt to take profits over the next several weeks."

For now, Stovall has downgraded the sector from "overweight" to "market weight" as he waits out the correction he sees coming.

However, looking ahead, Stovall and other market pros point to reasons for continued optimism in technology. The industry is obviously a huge one encompassing a lot of different sectors, with chip makers like Intel (INTC), Internet giants like Google (GOOG), and systems-and-software designers like IBM (IBM). But there are common themes to tech that keep professional stock pickers and investment experts optimistic about the industry.
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No positions in stocks mentioned.
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