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Reading the Tech Bellwether

Intel's (Nasdaq: INTC  ) Q2 earnings, out Tuesday after the bell, will tell investors a lot about tech sector prospects. Following a week that saw more than one tech earnings warning, many investors are starting to worry that tech spending, after two strong quarters, is winding down. That worry is pushing down tech stock prices. Intel's Q2 report will either ease or reinforce tech investors' anxieties.

What should Fools be looking for tomorrow from Intel's report? Start with sales growth. If Intel beats the $8.1 billion mark, that could be a sign that businesses plan upgrades and back-to-school PC sales will be healthy. Intel chips are used to power PCs using Microsoft (Nasdaq: MSFT  ) software, so a sales slowdown at the chip level could foreshadow weakness for the world's biggest software maker.

The second quarter is typically a weak one for technology companies, so higher Q3 guidance will be a welcome sign. Lower guidance could add support to today's Merrill Lynch downgrade on Intel and the chip sector. Merrill slashed its 2005 chip industry sales growth estimates to 6% from 16%.

Keep an eye on Intel's inventory levels, too. Inventory gains could mean that Intel is upbeat about tech sector growth and demand for its new line of processors. On the other hand, recall when the technology bubble burst: A lot of companies aggressively built up inventories and, when demand sank, got stuck holding unwanted goods. A run-up in Q2 inventories could mean a repeat.

Bad news from Intel could dent Microsoft shares, but it may also hurt chip makers such as Advanced Micro Devices (Nasdaq: AMD  ) , Texas Instruments (NYSE: TXN  ) , and Novellus Systems (Nasdaq: NVLS  ) ; computer makers Dell (Nasdaq: DELL  ) and Hewlett-Packard (NYSE: HPQ  ) ; plus other software makers such as Oracle (Nasdaq: ORCL  ) .

What are your thoughts on Intel's earnings? Share your opinion on the Fool's Intel discussion board.

Fool contributorBen McClure hails from the Great White North. Ben owns shares in Dell.

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