After months of gloom, chip makers are becoming more confident that the market has stabilized, even as the rest of the technology sector still suffers from tepid demand and uncertain prospects.

A better-than-expected quarterly report from Analog Devices Inc. (ADI) Tuesday night is the latest sign that conditions in the chip sector are improving. The results - coming a month later than most in the sector and on the back of optimistic comments from Intel Corp. (INTC), Texas Instruments Inc. (TXN) and others - suggest the worst may be behind semiconductor companies.

Though chip stocks have rallied in recent months, there's room for more gains if the bullish signs continue, particularly if Texas Instrument's mid-quarter update and National Semiconductor Corp.'s (NSM) earnings - both due in early June - add to bullish sentiment.

And the bar may still be low for companies to surprise on the upside.

"At least at this level of economic activity, the estimates have probably been conservative," Stifel Nicolaus analyst Cody Acree said, adding that more bullish news would lead to further stock gains.

Since the end of last quarter the Philadelphia Semiconductor Index, or SOX, is up about 15%, roughly in line with the Standard & Poor's 500. In the same period, the broader Morgan Stanley Technology Index has gained 19%, suggesting that chip stocks are lagging other tech stocks.

Of course, investors still have reason to stay cautious about jumping into chips for the long haul. While sentiment may be changing, the companies are still reporting significant year-over-year declines in revenue and earnings. For example, Analog Devices' report was considered surprisingly good, leading to a 17% gain Wednesday in its stock price, but revenue still fell 27% from a year earlier.

Analysts warn that any run in chip stocks could be short-lived, as overall demand for technology products from consumers and businesses remains subdued.

"End-demand continues to be weak," said Robert W. Baird analyst Tristan Gerra. "It's a question as to whether end-demand could pick up in the second half."

And other parts of tech remain cautious. For example, Hewlett-Packard Co. (HPQ) Chief Executive Mark Hurd said Tuesday that he's "not ready to call the market better." He added that business spending on IT continues to be restricted by companies' caution about the future, and any uptick in business IT spending may not be seen until much later this year.

That contrasts with recent optimistic comments from chip makers. Last week, executives from chip titan Intel said conditions in its existing businesses aren't as bad as people think. Chief Executive Paul Otellini, who in April said demand for chips had reached a bottom, said order patterns indicated that business is "a little better" than expected.

On Friday, Carlo Bozotti, head of STMicroelectronics NV (STM) Europe's largest chip maker, said early signs of improvement in the semiconductor market have continued.

Earlier this week, TI Chief Executive Rich Templeton said inventory levels have been stabilizing - an important signal that the massive cuts in orders from customers seen late last year have subsided.

And ADI's better-than-expected quarter reflected a period ended May 2, a month into most companies' current quarter, offering optimism for the results to be reported in July.

-By Jerry A. DiColo; Dow Jones Newswires; 201-938-5670; jerry.dicolo@dowjones.com