Semiconductor stocks led Wall Street lower yesterday amid renewed concerns that the chip industry could be heading into a cyclical downturn through the second half of this year and into 2005.

Merrill Lynch, the investment bank, cut its forecast for the sector's 2005 revenue growth to 6 per cent from 16 per cent, citing weaker-than-expected demand for semiconductors from the computer hardware industry.

Worldwide shipments of integrated circuits - everything from microprocessors to memory chips - reached $17.32 billion (€13.96 million) in May, the highest level since the boom year of 2000.

The Semiconductor Industry Association, a Washington-based industry group, believes that sales will remain strong for the rest of this year.

However, most Wall Street analysts now agree that the booming sales of the last few months cannot be sustained. The downturn could be accentuated by the high levels of semiconductor inventory being carried by computer and consumer electronics manufacturers.

Merrill Lynch cut its rating on the entire sector from "overweight" to "underweight". It said: "We believe that the risk of a material downward adjustment in the financial outlook for the semiconductor business is higher now than at any point since early 2002." Merrill also cut its rating on semiconductor equipment- makers to "neutral" from "overweight".

Beyond Wall Street, industry analysts agree that the booming chip sales of the last few months will not be sustained.

Today, all eyes will be on Intel, which is scheduled to announce second-quarter earnings. While analysts are not expecting big surprises from the industry leader, comments by Intel executives on the trading outlook will be watched closely.