Analysts reevaluating their positions after a turbulent week in the stock market were only cautiously optimistic about what the the rest of the year will bring for banking and financial stocks.
"For the next three to six months, I expect banks to be generally market-performers," said Catherine Murray, who covers regional and superregional banks for J.P. Morgan Securities. Some bank issues may even underperform the broader market, Ms. Murray said.
She predicted that worries about rising interest rates and skepticism about consumer credit quality will continue to sway investors, despite reassuring remarks on rates by Fed Chairman Alan Greenspan in his congressional testimony Thursday and treasuring second-quarter earning reports by credit card issuers.
Between July 5, when a stronger-than-expected employment report touched of a slide in equity prices, and July 17 - when the markets began to mount a recovery - money-center bank stocks fell 4.2% on average, and regional bank issues slipped 4.6%, Ms. Murray said.
This performance was far better than that of the S&P 500, which fell 5.7% and the Nasdaq, which was off 6.3%, the J.P. Morgan analyst said.
Some analysts said the performance of the banks indicated that some investors have come to view the bank stocks as a "safe haven" in difficult times.
Katrina Blecher of Gruntal & Co. said she remains "bullish on the banking group" because banks have "shown resiliency in a tough market." She noted that the deterioration in credit quality was not the catastrophe for second quarter earnings that some investors had feared.
But Ms. Murray said she is not convinced by the "safe haven" theory. She argued that the principal reason banks outperformed other stocks is that the possibility of a rate hike had already been factored into the banks' stock prices. "As expectations began to change the banks moved ahead of general market," Ms. Murray said.
She added that the sector probably will regain strength toward the end of the year, when she expects investors to "begin to anticipate" that the Federal Reserve will stop raising interest rates.
Perrin Long, an independent analyst in Darien who covers brokerage firms, said that interest rate fears and weak earnings could continue to drag down the markets.
Over the short term a falling market could hurt brokerages' shares, which tend to move in the same direction as the broader market, only faster, Mr. Perrin said. For the same reason, he said, the brokerages' stocks are a good long-term investment, assuming the markets continue to grow.
Michael Diana, who covers finance companies for Bear Stearns & Co., said he was optimistic that the firms he covers can beat analysts' earnings expectations this year and next. This is especially true of firms specializing in housing finance, which is not as subject to bankruptcy risk as unsecured lending.
He was especially optimistic about Money Store, whose stock rose sharply from a depressed level late last week in anticipation of its earnings report on Wednesday.
But Mr. Diana also expressed doubt that the jitters over rates and credit quality have dissipated for good.
"These companies are all going to make or beat their earnings estimates this year and next. But even if they make their numbers, that could be overshadowed by macroeconomic news," Mr. Diana said. "The macroeconomic concerns are in the background right now, but they could pop up at any time."