Bank stocks fluctuated in and out of red territory Monday as investors awaited Tuesday’s meeting of the Federal Reserve’s Open Market Committee and word of another interest rate cut.

Meanwhile analysts continued to revise their estimates down for companies that have the most exposure to capital markets. Keefe, Bruyette & Woods lowered its estimates for J.P. Morgan Chase & Co. on Monday, citing a slowdown in investment banking activities during the first quarter. The New York boutique firm maintained its “buy” rating for Morgan Chase shares but lowered full-year estimates for 2001 and 2002. It reduced its 2001 earnings estimates from $4 a share to $3.50 and 2002 earnings from $5 to $4.50.

Keefe Bruyette placed Morgan Chase’s first-quarter earnings at 75 cents per share, down from $1.01 during the same period last year. It also revised its one-year price target for shares to $63, from $80.

Analyst David Berry said the estimate reductions reflect the slumping market conditions. “We are a lot more cautious about market-sensitive revenues,” Mr. Berry said. “We are hoping for a return to better market conditions at some point in the next year.”

Morgan Chase, the result of last year’s merger of Chase Manhattan Corp. and J.P. Morgan & Co., has experienced a slump in its loan syndication and corporate advisory units, as well as its equity underwriting business, Mr. Berry said.

For Morgan Chase’s predecessors the first quarter was strongest for trading and debt issuance, Mr. Berry said. “The debt business is very strong,” he said. “Every other business is very slow. It makes sense to be a lot more cautious.”

Mr. Berry estimates that Morgan Chase will have about $2 billion of trading revenues for the first three months of this year, a healthy increase from the $1.4 billion of trading revenues from the fourth quarter. Investment banking revenues should be approximately $1 billion in the first quarter, down slightly from the $1.05 billion during the fourth quarter, Mr. Berry said.

But Mr. Berry predicted less revenues from investment banking fees because of a slowdown in mergers and acquisitions announcements. “A more cautious outlook for trading and investment banking revenues for the full year is the primary driving factor in our estimate reduction,” he said.

Stocks fell in midday trading as investors tried to figure out how much the Federal Reserve will cut interest rates. Some investors on Wall Street expressed hope that the Fed would cut key rates by half a percentage point, or 50 basis points, while others called for a cut of 75 basis points. Observers said Wall Street will be disappointed with a less aggressive cut, which would lead to a decline in stock prices.

Bank stocks recovered in the afternoon. The American Banker index of 50 bank stocks rose 1.4%, and the index of 225 bank stocks rose 2.3%. Shares of Morgan Chase rose 1.3%, to close at $45.15.

Diane Swonk, chief economist at Bank One Corp., said she believes the market will rebound within months — back up into the 4% range in the second half of the year. “This is sharply stronger than many on Wall Street are expecting,” she said. A forecast for stronger growth will make “the equity markets ripe for a midyear rally,” she said.

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