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Analysts are increasingly concerned with Intel‘s shrinking profit margins and expect its quarterly profit to drop.David Paul Morris/Bloomberg

Investors are braced for bad news from the world's leading computer-chip makers. The question now is just how bad it will be.

Analysts have been cutting their estimates in advance of Intel Corp.'s quarterly earnings, which the industry giant is scheduled to release after the market closes Tuesday. Worries are growing that a sector that appeared poised for solid growth at the start of the year now may be slowing faster than anyone anticipated – raising serious doubts about the market's profit assumptions for the remainder of the year.

"We were seeing signs of a return to growth. But the macro [economic] environment is proving very challenging," said analyst Doug Freedman of RBC Dominion Securities in San Francisco. As a result, he said, expectations that chip makers would enjoy a few quarters of above-seasonal sales now look in doubt.

The world's No. 2 computer chip maker, Advanced Micro Devices Inc. (AMD), will deliver its results Thursday, while several smaller semiconductor companies are slated to issue earnings reports this week and next. AMD already spooked the market last week when it issued a warning that its revenues would be down 11 per cent from the first quarter – much worse than the 3-per-cent increase it had previously projected. AMD placed the blame on slumping sales in Europe and China.

Semiconductor-manufacturing equipment maker Applied Materials Inc. also warned that its sales and profits would be well below its previous targets for the fiscal year ending Oct. 28 – evidence that its customers, the world's leading chip makers, are hitting the brakes.

Meanwhile, a report last week from tech-sector research firm Gartner Inc. said that personal-computer shipments fell about 2 per cent in the second quarter from the first quarter, another sign of sluggish demand for microchips.

"This is an industry that is very seasonal," said Mr. Freedman, adding that semiconductor demand is typically stronger in the second half of the year due to back-to-school and Christmas-season purchases of consumer electronics. "The question is, how much of that [second-quarter] weakness is seasonal."

Prices for chip makers have pulled back substantially this year in light of the deteriorating market conditions. The Philadelphia Stock Exchange Semiconductor index (SOX), the market benchmark for semiconductor stocks, has tumbled 20 per cent since late March, far worse than the 4-per-cent pullback in the S&P 500 over the same period. Forward price-to-earnings multiples have contracted from more than 16 to 14.

"The deteriorating environment appears to be somewhat discounted [by the market]," said analyst Ruben Roy of Mizuho Securities USA Inc. in New York.

However, he cautioned, analysts' consensus earnings forecasts still reflect "above-seasonal growth" for the third quarter – which looks increasingly unrealistic. "We believe that estimate reductions are likely," he said.

As for Intel, analysts' consensus estimate calls for a quarterly profit of 52 cents (U.S.) a share, down from 55 cents a year earlier, according to data gathered by Thomson Reuters. Sales are estimated at $13.5-billion, up from $13-billion a year ago.

But analysts have become increasingly concerned about Intel's shrinking profit margins, as the company has cut prices for its products to compete in the tough environment.

Thomson Reuters senior analyst John Kozey said the analysts with the best track records for forecasting Intel earnings are becoming increasingly bearish on the outlook for sales over the remainder of the year.

Their average revenue forecast for all of 2012 is now almost 10 per cent lower than the overall consensus.