A headline in the Aug. 12 Business section incorrectly characterized the performance of the Dow Jones industrial average Wednesday. The Dow did not gain; it closed down 6.35 points. (Published 8/13/04)

Around this time last year, as technology stocks roared ahead, some skeptical money managers and analysts said they feared the return of irrational exuberance. They warned of a painful market correction in the near future.

Now it looks like they may have been right.

After a one-day bounce based on an upbeat economic forecast from the Federal Reserve, the Nasdaq composite index, dominated by technology shares, continued its six-month decline on Wednesday, dropping 26.28 points, or 1.5 percent, to close at 1782.42.

The index is down 11 percent for the year, more than double the loss for the Dow Jones industrial average and more than three times the decline for the Standard & Poor's 500-stock index. The Dow dropped 6.35 points on Wednesday, or less than 0.1 percent, to close at 9938.32, while the Standard & Poor's index declined 3.25 points, or 0.3 percent, to finish at 1075.79.

Cisco Systems, whose routers run most of the world's Internet traffic, led the Nasdaq sell-off on Wednesday.

The company beat Wall Street expectations Tuesday with quarterly earnings of $1.4 billion. But chief executive John T. Chambers warned that customers were becoming "more cautious" about the economy and that sales in the current quarter could slow. Cisco shares began sliding in after-hours trading Tuesday and continued their fall Wednesday, dropping $2.17, or nearly 11 percent, to close at $18.29.

Cisco's decline underscored the mentality plaguing tech stocks: Wall Street does not care about current results. Future prospects are everything.

"This market is built on expectations right now," said Stephen C. Thormahlen, president of Fiduciary Investment Management International in the District. "When [Cisco chief executive] Chambers comes out and says the next quarter doesn't look so hot, everyone gets nervous."

The nerves spread well beyond Cisco on Wednesday.

Shares in National Semiconductor, which makes microchips that boost battery life in laptops and cell phones, sank $2.22, or 14 percent, to close at $13.48, after warning that sales this quarter could drop as much as 5 percent.

Analysts and money managers said the market now is more inclined to react to such corporate warnings than it is to upbeat comments from the Fed. They said much of the 2003 run-up in technology stocks was built on the assumption that a recovering economy would spark a boom in technology spending by corporate America in 2004. Now that spending is in question.

"There seems to be a lot of unevenness in the economy and in corporate capital spending," said Tom Taulli, a technology investor and co-founder of the initial public offering research site CurrentOfferings.com. "It may take another year or year and a half to get to more sustained growth. . . . Maybe we jumped the gun last year and took valuations too high."

In fact, any assessment of technology stocks this year must be viewed in the context of last year's powerful rally. After hitting a post-bubble low of 1114.11 on Oct. 9, 2002, the Nasdaq gained 50 percent in 2003, to close at 2003.37. Shares of technology-sector stocks rose 44 percent during the year, according to Piper Jaffray. The gains continued through Jan. 26 of this year, when the Nasdaq peaked at 2153.83.

It has been downhill since, as some investors decided stock prices had outpaced potential earnings growth and sold to take profits. Economic uncertainty fueled more selling. Now even strong earnings often fail to send stocks higher.

"When companies come out with pretty good earnings now, it's just not enough," said Michael Obuchowski, money manager at Altanes Investments in New York. "What's probably going to have to happen is not only will companies have to grow earnings more . . . but expectations will have to be tempered."

The rocky stock market has been especially tough on companies offering shares to the public for the first time.

Many firms, enticed by market gains in 2003, lined up to go public in 2004, only to see their stocks trade at lower prices than expected. According to data firm Dealogic, of 140 IPOs this year, 16 began trading above their estimated price range, 71 began trading inside the range and 53 dropped below it.

Manish D. Kothari, president of AlphaSmart, a Los Gatos, Calif., maker of low-priced classroom technology, said he did not regret going public in February even though the company's stock closed Wednesday at $3.99, well below its $6 offering price.

Kothari said sales for the company's products should pick up when the economic recovery starts to fatten school budgets. "We won't see that until the economy really turns," he said "But our sense is things are improving and generally going in the right direction."

Among the handful of tech IPOs this year, mainly profitable firms, such as online jeweler Blue Nile and software maker Salesforce.com, have managed to start trading above their IPO prices. And even those firms have seen their share prices decline after early spikes.

Meanwhile, more than a dozen planned IPOs have been postponed this year. And investment bankers say technology firms that had been thinking about going public are deciding against it. "The bar has been raised pretty significantly" for executing successful IPOs, said Robert J. Woolway, managing director at San Diego investment bank Relational Advisors.

Hopes that next week's expected offering from online search firm Google would renew enthusiasm for technology IPOs have ebbed as well. Investors large and small have said they may sit the offering out, fearing that Google's price might be too high.

"If anything it has been harmful," Taulli of CurrentOfferings.com said of the Google hype. "There has been so much overexposure.""

Thormahlen of Fiduciary Asset Management said the technology slide would probably continue until solid economic data arrives, especially regarding employment. More hiring could mean more spending on software and hardware for new workers.

The first winners in such a recovery, Thormahlen said, would be big firms such as Microsoft and Dell, which reports earnings on Thursday. Smaller firms could then gain when larger ones start placing more orders.

Other Indicators

* The New York Stock Exchange composite index fell 16.51, to 6278.60; the American Stock Exchange index fell 6.62, to 1211.55; and the Russell 2000 index of smaller-company stocks fell 3.20, to 526.63.

* Declining issues outnumbered advancing ones by 4 to 3 on the NYSE, where trading volume rose to 1.4 billion shares, from 1.24 billion on Tuesday. On the Nasdaq Stock Market, decliners outnumbered advancers by 12 to 7 and volume totaled 1.78 billion, up from 1.44 billion.

* The price of the Treasury's 10-year note rose $1.88 per $1,000 invested, and its yield fell to 4.27 percent, from 4.29 percent on Tuesday.

* The dollar fell against the Japanese yen and rose against the euro. In late New York trading, a dollar bought 110.81 yen, down from 111.42 late Tuesday, and a euro bought $1.2214, down from $1.2231.

* Light, sweet crude oil for September delivery settled at $44.80, up 28 cents, on the New York Mercantile Exchange.

* Gold for current delivery fell to $395.50 a troy ounce, from $400.00 on Tuesday, on the New York Mercantile Exchange's Commodity Exchange.