Data storage and security stocks were hit particularly hard, pushing the Nasdaq composite index down 178.66 points, or more than 7 percent, to 2,291.86. The Standard & Poor's 500 index fell 37.01, or nearly 3 percent, to 1,283.87 and the Dow Jones industrial average declined 140.70 to 10,646.15.
"Recent industry checks indicate IT (information technology) purchases will fall off sharply in (the first quarter of 2001)," Robertson Stephens analyst Dane Lewis wrote in a research report. "Reasons for our concerns include macro-economic issues and decreasing threat from dot-coms, allowing bricks-and-mortar companies to slow the deployment of their Web initiatives."
Spending for IT software in the first part of 2001 will pale in comparison to post-Y2K expenditures, Lewis noted in his explanation for downgrading CacheFlow, Certicom, EMC, Security Systems, Netegrity, Network Appliance, Network Engines, Quest Software, Verisign and Veritas Software.
Lewis also downgraded Internet search company Inktomi from "buy" to "long-term attractive" because its revenues are at risk from "the high cost of its products and its large customer concentration of service providers."
Merrill Lynch analyst Henry Blodget followed suit by downgrading Inktomi to near-term ''accumulate'' from ''buy."
Inktomi shares briefly fell to a 52-week low of $13.31 to close at $14.38--well off its high of $241.
Among the tech stocks downgraded by Robertson Stephens:
CacheFlow shares, which were cut from "strong buy" to "buy," sank 17 percent to $14.06 and set a 52-week low of $13.56 earlier in the day. Shares have traded as high as $182.18 in the past year.
Certicom was downgraded to "long-term attractive" from "buy." Shares dropped 18 percent to $16.63, and have traded as high as $47.23 and as low as $12.31 in the last year.
EMC was cut to "long-term attractive" from "buy." Shares in the company fell 18 percent to $54.31. The shares have traded as high as $104.93 and as low as $41.65 in the last year.
Internet Security Systems was downgraded to "long-term attractive" from "buy." The shares almost 17 percent to $65.19. They have traded as high as $141 and as low as $44.37 in the last 52 weeks.
Shares in Netegrity were downgraded to "buy" from "strong buy." The stock, which fell about 25 percent to $40.69, has traded as high as $80.87 and as low as $14.08 in the last year.
Shares in NetIQ, which were downgraded to "long-term attractive" from "buy," dropped about 25 percent to $65.63. The stock has traded as high as $111.50 and as low as $28.87 in the past year.
Network Appliance was downgraded to "long-term attractive" from "buy." The shares fell about 20 percent to $51.44. In the last 52 weeks, shares have traded as high as $152.75 and as low as $29.84.
Network Engines was downgraded to "long-term attractive" from "buy, sending its shares down 45 percent to $2.28. The stock has traded as high as $48.50 and as low as $1.12 in the past year.
Quest Software was downgraded to "buy" from "strong buy." The shares fell more than 15 percent to $23.69 and set a new 52-week low of $21.25 earlier in the day. Shares have traded as high as $98.12 in the past year.
Shares in Verisign, which were downgraded to "long-term attractive" from "buy," dropped more than 16 percent to $61.81, well below its 52-week high of $258.50.
Veritas Software was downgraded to "long-term attractive" from "buy." The shares fell more than 24 percent to $66, less than half of their 52-week peak of $174.
On the broader economic front, the National Association of Purchasing Management (NAPM) said its index fell to 43.7 percent in December, down from the 47.7 percent reported in November.
The December number, which measures manufacturing activity, was significantly lower than analysts' expectations of 47.1 percent.
The NAPM index is compiled from surveys of more than 350 purchasing executives who represent various manufacturing industries in the United States. Analysts interpret an index reading above 50 as a sign of growth in manufacturing, while a figure below 50 means contraction.
NAPM said in a statement that the purchasing index has reached the lowest point since April 1991, when it hit 42.9 percent. The index has also been significantly less than 50 percent for the past three months.
Peter Kretzmer, an economist at Banc of America Securities, thinks the numbers raise the chances that the Federal Reserve will cut interest rates at a faster-than-expected pace. The Fed's next scheduled meeting is in late January.
Whether the Fed changes interest rates depends on whether it believes the American economy in headed towards a healthy slowdown or a more serious recession.
"The fact that manufacturing has not been this slow in almost ten years is not lost on (the Fed)", Kretzmer said.
The members of the Federal Open Market Committee (FOMC), the group that sets monetary policy for the Fed, decided in their last meeting on Dec. 19 to leave interest rates unchanged. But the FOMC reversed its so-called bias, or outlook on future economic conditions, to a more benign stance toward inflation.
Among other tech shares that weakened Tuesday were makers of optical equipment. Ciena dropped $15.38, or about 19 percent, to $65.88, while Juniper Networks fell $23.50, or more than 18 percent, to $102.56.
Other large-cap stocks dragged the tech sector lower. Cisco Systems fell $4.94, or about 13 percent, to $33.31; Oracle dropped $2.69, or 9 percent, to $26.38; and Sun Microsystems stumbled $2.44, or 8 percent, to $25.44.
On the positive side, Intel rose $1 to $31.06 on heavy volume of 50 million shares. Microsoft gained earlier in the day to close flat at $43.38 on 41 million shares.
The CNET tech index fell 89.65 to 1,894.75. Losers roughed up winners, with 66 of the 97 stocks in the index falling, 24 rising and 7 remaining unchanged.