The high-tech weighted Nasdaq Composite has dropped 45 per cent from its March 10 high of 5,048.62 and year to date, the index has declined over 31 per cent.

After gaining a record 10.5 per cent last Wednesday, the Nasdaq has slumped 4.8 per cent and has left many investors wondering if the index will challenge its worst year since 1974, when the Nasdaq plunged 35 per cent.

Although the presidential impasse, tax-loss selling and the possibility of margin calls are all factors overhanging the market, I believe the primary forces that will determine future market direction of the Nasdaq will be interest rates and corporate earnings.

During a recent speech, Alan Greenspan, the U.S. Federal Reserve Chairman, alluded to the possibility of a more lenient stance on interest rates.

It is widely believed that at the next Federal Reserve meeting, scheduled for Dec. 19, the Federal Reserve will remove its longstanding bias towards higher interest rates and open the door to the possibility of lowering interest rates in the new year.

Lower interest rates would be viewed positively by the equity markets, as companies would obtain some relief on interest expenditures and make corporate borrowing more economical.

In my opinion, corporate earnings remain the leading cause of market uncertainty. According to First Call/Thomson Financial, which polls analysts for their profit expectations of companies, more than 275 companies have issued profit warnings for the fourth quarter ending Dec. 31.

That’s more than 45-per-cent higher than the 188 companies that issued earnings warnings over the same period last year.

Some of the more recent names that have warned of lower earnings include Motorola Corp., Apple Computer Inc., Gateway Inc., Intel Corp. and National Semiconductor Corp.

If analysts are somewhat accurate in their forecasts of future corporate earnings, then I believe the severe correction in the Nasdaq will soon come to an end.

When assessing companies on an individual basis, numerous high-tech companies appear attractive. For instance, earlier in the year Nortel traded at a price/earnings (p/e) ratio of 120 times 2001 earnings.

Today, Nortel trades at a much more reasonable p/e ratio of 38 times 2001 earnings.

A second ratio that is gaining in popularity is the PEG ratio. A company’s PEG ratio is calculated by dividing the company’s p/e ratio by its earning growth. Once again, using Nortel as an example, the company is forecasted to grow earnings by 34 per cent in 2001.

Therefore, Nortel’s PEG ratio is a modest 1.1 (38/34) compared to a PEG ratio of 3.4 prior to its stock price correction.

Traditionally, the high-tech sector has traded at PEG ratios between 0.8 and 4.0.

Presently, high-tech companies are trading near their historic lows with an average PEG ratio of 1.2. If analysts’ earnings projections are accurate, then I would argue that the high-tech sector currently offers excellent long-term value.

Over the years, technology has consistently advanced at more rapid rates. Looking forward, I believe that technology will remain a leading driver of our economy, it will continue to be at the forefront of productivity advancements and it will be the home of many of the world leading corporations.

At current valuations I recommend that investors gradually increase their exposure to high-tech companies that have clear earnings visibility and low PEG ratios.

(Derek Ballendine is an investment executive with ScotiaMcLeod Inc. These views and ideas belong to Derek Ballendine and do not necessarily reflect the views and ideas of ScotiaMcLeod.)