Bank stocks tallied further gains on Wednesday, despite a report of explosive economic growth that renewed concerns about higher interest rates.
Investors were initially nonplused, but then returned to the market, after the news that the nation's economy expanded at a 5.6% annual rate in the first quarter, the fastest pace in a decade.
The Standard & Poor's bank index was up 1.04%, again outpacing the broad-market S&P 500 index, which rose 0.92%. The Dow Jones industrial average surged past the 7,000 mark again, gaining 46.96 points to 7008.99.
The market's latest rally overwhelmed fears that the booming economy will compel the Federal Reserve to push up interest rates again in a few weeks.
Despite the stocks' upward trajectory over the past few days, however, Wall Street analysts remained cautious.
"I expect a lot of very mixed sentiment over the next few months," said Nancy A. Bush of Brown Brothers, Harriman & Co., New York. "Euphoria and despair are going to be the two dominant emotions."
"We are going to play the 'interest rates versus economic activity' game for quite a while," she said. "But there is still quite a lot of willingness to believe in the bull market, and whenever that kicks in, the banks benefit.
"It was a quite respectable first quarter, which is normally a slow earnings quarter for banks," Ms. Bush said. "Investors are going to continue to be attracted to that, but I doubt that is going to get us to valuation levels in these stocks beyond what we saw earlier this year."
Another banking industry analyst, John D. Rooney Jr. of Legg Mason Wood Walker Inc., said he was increasingly nervous about bank earnings in late 1997 and especially in 1998. "I'm not sure what the banks are going to do for an encore," after the strong earnings performance of the last several years, he said.
"With the banks, you have to wonder at what point you start sacrificing loan quality for earnings," Mr. Rooney said. "At some point along the line, you have to start lending money more aggressively if you want to play the game.
"I still think of banking as a cyclical business, and not as a growth industry. The quality of the earnings has got to be questioned at certain points in the (economic) cycle," he said.
"How long can inflation stay under wraps with the economy growing at this pace?" asked Mr. Rooney, who anticipates further rate increases from the Federal Reserve.
As for the benign first quarter inflation data released earlier in the week, "they made people happy, but I don't think those numbers proved anything" and won't prevent Fed action, Mr. Rooney said.
If the Fed moves to decisively slow the economy, the banks' earnings will feel the chill as usual, he said. That could cause some banks' earnings projections for next year to fall short, "because without the economy, there is just no way in hell you can do it."
