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The debate on the potential consequences of the U.S. going over the fiscal cliff rages on, but one thing is already clear: Investors in the technology sector are staring some ugly earnings surprises in the face as corporate spending is delayed.

A New York Federal Reserve survey of business management suggests that capital spending growth has come to an abrupt halt. The Empire State Manufacturing Survey 6M Ahead Capital Expenditure Survey, which asks managers to predict changes in business investment in the next six months, began a sharp slide in March of 2012. The S&P Information Technology Index, which normally follows the Fed survey (see chart on left), ignored this omen of lower corporate spending and trundled higher by 7 per cent in the third quarter.

Congressional failure to avoid the fiscal cliff will result in an estimated $600-billion (U.S.) in tax increases beginning in 2013. Corporate management teams are already preparing for higher taxes by delaying investment – saving funds for Uncle Sam.

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The technology sector will be among those hardest hit. The sector had previously benefited from efficiency-related corporate spending as companies looked to cut jobs to maintain bottom line growth.

It is difficult to see how technology companies will achieve current profit forecasts while corporate wallets are slammed shut, awaiting news from Washington. Fourth-quarter results are unlikely to match the previous period, when technology stocks followed the overall pattern of poor sales growth but small improvement in profits.

Importantly, corporate spending is likely only delayed, not cancelled, which suggests that while the risk of disappointments is high, significant investing opportunities should also be available. Investors will need to be nimble to avoid market reaction to profit disappointments while finding technology companies that are oversold in the aftermath.

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