Bank stocks gained ground last week, but observers said the rally could be a brief one.
The Standard & Poor's bank index gained 1.4%, to 462.95, in the week, but was still well shy of its all-time high of 549.31 on March 11.
Positive earnings reports lifted the stocks, but it won't be long before interest rate fears begin to drag them down again, as the May meeting of the Financial Open Market Committee nears, investors and analysts said.
"I'm happy to see that earnings have temporarily displaced the talk of interest rates as a news item," said Scott Edgar, director of research for Sife Trust Fund, Walnut Creek, Calif. "Once earnings season comes to a close, though, I fear that theorizing on interest rate increases will send us down a little more, until we get economic numbers that show us differently."
William Schneider, a vice president at Salomon Brothers who specializes in trading bank stocks, noted that "bank stocks have really been all over the map."
"The bounce the market's having now seems primarily earnings driven, and investor psychology may creep back in and weigh the market down," he added.
Doug Cliggot, a market strategist for J.P. Morgan & Co., said he anticipates a rate hike that will prevent bank stocks from "breaking out on the upside."
"Bank stocks still remain very attractive in the long term, but in the nearer term, we're more cautious with the Federal Reserve raising short- term rates," Mr. Cliggot said. "Earnings have put a nice solid flow into the market, but the actuality of higher rates will prevent the market from growing above its February highs."
Angela Billon, director of research at Johnston London Research, Washington, noted that the community banks' stocks have done well lately and will benefit from dislocation of larger banks.
"It's definitely going to be a stock pickers' market this year," Ms. Billon said, noting that the smaller community banks are not as exposed to credit risks and have worked to diversify revenue streams.
"As interest rates turn up, we'll see more credit deterioration in the larger institutions that have effectively managed their interest rate risk," Ms. Billon added.
Smaller banks will also benefit from the continuing trend of buybacks and consolidation, she said.
But Mr. Edgar said he's "weeded" many of the smaller banks out of his portfolio, reasoning that many of them will have difficulty keeping up with the spending on technology of their larger competitors.
"Technology is really the make-it or break-it issue for financial companies," Mr. Edgar said.
The investor added that he's still seeing the strongest performance in big banks, such as Bank of New York Co., Citicorp, and J.P. Morgan.
