For tech stocks, anything but great news is bad news

A moody market braces for a big earnings week. How ugly will it get?

It’s time to face the music.

When leading tech companies offer their earnings numbers this week, Wall Street’s focus won’t be on how healthy their overseas businesses are, or how strong sales were during the holiday season. Instead, with global financial markets in turmoil, analysts will be sensitive to hints that executives are losing their sunny optimism.

Apple stock has swung widely since November, as investors tried to predict how it will fare in an uncertain economy. The company offers its latest earnings numbers on Tuesday.

When Intel CEO Paul Otellini offered his company's earnings report last week, Wall Street focused less on record quarterly revenues, and more on his cautious outlook. Courtesy: Intel

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Indeed, as the fallout from the subprime mortgage crisis rippled across the U.S. economy in recent months, tech CEOs sounded immune, trumpeting the idea that their businesses no longer rise and fall with the spending habits of big U.S. customers. Booming economies in Europe, Asia and South America would continue growing despite any U.S. slowdown, their argument went — so even if the U.S. economy stumbles, the tech industry would prosper.

But then global markets tanked Monday on fears of a U.S. recession, and the Federal Reserve cut a key interest rate by three quarters of a point to stabilize things. That signaled that investors in Europe, Asia and elsewhere aren’t convinced that their growth will zip along without help from free-spending Americans. So with their old prosperity story looking less plausible, tech executives will have to tweak their stump speeches.

What will they say now?

If history is any guide, not much. When Apple (AAPL), Microsoft (MSFT), eBay (EBAY), Sun Microsystems (JAVA) and others report earnings this week, they’re likely to emphasize their positive momentum and simply say they’re closely monitoring global markets. Jittery analysts, who so far have been slow to trim their 2008 earnings forecasts for the companies, may respond to the caution by ratcheting down their earnings projections.

Just look at Wall Street’s response to the results Intel (INTC) announced last week. The chip giant has as much of an international story as any company out there; the PC boom in Europe and Asia helped fuel its recovery in 2007. But Intel disappointed analysts with sales numbers that came in on the low side of the range they'd been told to expect. Intel blamed weakness in flash memory prices, though realistically, even if flash prices had held up, analysts probably wouldn’t have been thrilled by results that merely hit the midpoint of Intel’s projections.

So investors, viewing this as a sign that Intel executives have limited insight into troubles ahead in 2008, immediately shaved more than 15 percent off the stock’s value in after-hours trading. Analysts cut their 2008 revenue and earnings targets for the company.

CEO Paul Otellini clearly saw this as an overreaction. “You hear all of the pundits saying that the world is going to go to a trash basket, and you worry — it may be a self-fulfilling prophecy,” Otellini said after the earnings report. “At this point though, we don’t see anything on the horizon. Our customers don’t see anything on the horizon.”

Such comments might be reassuring, except that CEOs hardly ever admit to seeing trouble on the horizon. Part of their jobs as visionaries and motivators is to view every glass as half full. In a CEO’s world, customers are always excited about his upcoming product line. The new growth markets he or she has identified always show unlimited potential. And if the economy should turn sour, the company is always positioned to fare better than its competitors.

Alas, things rarely turn out so well. And that’s probably why down the hall from the C-suites, vice presidents and division heads in tech companies are prepping for a trying year. In conversations with industry watchers over the past few weeks, many have begun putting more emphasis on how their offerings will save enterprise customers money during tough times.

“I think there’s going to be a general downturn in the economy, and that’s going to cause a tightening in budgets,” said Anne Thomas Manes, vice president and research director at Burton Group, who has been talking to companies about their outlook for 2008. “That means that people are going to have to make do with what they have. So my expectations for this next year are kind of grim for the tech market.”

When budgets shrink, said Rick Becker, vice president of solutions at Dell (DELL), “what customers struggle with is, how do they maximize their IT investment in these trying times?”

Business customers aren’t the only ones struggling; investors are having a difficult time, too. In this market, stocks like Apple and Research in Motion (RIMM), which trade at price/earnings multiples above 40, are very much emotional plays. That makes them especially subject to the market’s wild mood swings — Apple stock for instance lost $35 billion in value last November, gained it back by January, and has since lost much of it again. Google (GOOG) has seen similar fluctuations.

It doesn’t look like many folks expect things to perk up soon — at least not in a sustainable way. With the White House and Federal Reserve scrambling to find ways to give the U.S. economy a shot in the arm, the question isn’t whether the U.S. economy will sag this year, it’s whether it can bounce back in the second half of 2008.

So should you bet that tech stocks will hold up despite the economic gloom? That depends on whether you believe the CEOs who say the rest of the world will keep growing no matter what happens with the spending habits of American consumers and businesses. Here’s the danger, though: If U.S. spending slows, that could mean less money in the pockets of overseas businesses. And if they have less money, it stands to reason that overseas businesses might just slow down on buying lots of things — including Apple iPhones, Cisco routers and Google ads.