Bank Stocks Gain Ground As Nasdaq Slips

Financial stocks benefited Wednesday by investor flight to the Old Economy, as Nasdaq stocks declined for the third straight day, though observers questioned whether the pattern truly signaled a change in fortunes for the sector.

In late-day trading, the Standard & Poor's index of 29 bank stocks was up 38.44, to 504.82, while the Dow was up 320.17, to 10131.41. The Nasdaq was down 124 for the day and 466 for the week.

"Some of the people that have made money in technology stocks are taking their winnings and putting them into financials," said Reilly Tierney, an analyst with Fox-Pitt, Kelton in New York. "But you will need a coordinated effort to see a meaningful rotation into financials."

That means a further retreat in earnings multiples for technology stocks and a stabilization of interest rates, Mr. Tierney said. And, he added, any sustained rally will depend on a belief that the Fed will soon end its campaign of raising interest rates, because financials have fallen so far.

Investors have been giddy over the Nasdaq, driving the index up 90% over the last year and stealing the upward momentum of most other sectors until the sharp downturn this week.

"We are slowly becoming more confident in the financial names, because part of the key to turning the sector around is the Nasdaq has to stop going up," said Scott Edgar, director of research for Sife Trust Fund in Walnut Creek, Calif.

The bigger question, Mr. Tierney said, is the longer-term impact of higher interest rates on bank earnings. Before this year many banks had argued they were shielded from rate hikes, but the opposite is proving true. As rates have risen, banks have seen their interest rate margins shrink enough to force some to warn Wall Street about lower earnings.

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