The semiconductor industry remains on track to record a significant increase in revenue during 2004, according to Gartner's latest forecast. After that, however, the outlook takes a turn for the worse.
Chip suppliers should take in $226bn (£125bn) in revenue this year, an increase of 27% on 2003, said Richard Brown, research vice-president for Gartner.
But revenue growth will slow considerably next year, to between 5% and 10%, and could also contract in 2006, he said.
Gartner said 2004 has been a strong year for chipmakers, but the industry cannot sustain a 27% growth rate as the PC replacement cycle wanes in 2005, Brown said.
"We believe we're entering a fairly traditional semiconductor cycle. Each cycle is different, but they are created by imbalances between supply and demand," he said.
Chipmakers have invested billions of dollars in new manufacturing plants and technologies which will increase the supply of chips just as demand starts to slacken toward the end of next year, he added.
Rising inventories among chipmakers have worried financial analysts in recent weeks.
Dell and Hewlett-Packard were happy with the performance of their PC divisions in the second quarter as corporations continue to slowly replace ageing PCs.
The second half of the year is usually the strongest for PC and chip companies, and industry bellwether Intel expects to post a significant increase in third-quarter revenue compared with the previous year.
Tom Krazit writes for IDG News Service