Bear Stearns Cos. Inc.'s report Wednesday that its earnings beat estimates by 14 cents lifted the brokerage sector considerably on a day when most financial stocks remained flat or fell further.
For the quarter that ended May 26, the New York investment firm's net income was $214.4 million, or $1.40 per share, up 8.2% from the year-earlier period. Analysts surveyed by First Call had estimated per-share earnings would be $1.26.
Including an after-tax charge of $96 million, however, which Bear Stearns attributed to litigation costs associated with the Henryk de Kwiatkowski case, net income was $118.4 million, or 77 cents per share - down 40.2%.
Nonetheless, as trading opened Wednesday most brokerage stocks rose, and continued to do so throughout the day. Bear Stearns ended the day at $42.25, up $1.375; Lehman Brothers at $91.75, up $5.125; Merrill Lynch at $113.8125, up $3.8125; and Morgan Stanley at $85.375, up $2.
"The Bear Stearns earnings, combined with the friendly data coming on the consumer price side, tends to bode well with the financials," said Blaine A. Frantz, a director and senior analyst at Barclay's Capital. "And that's why we are seeing the positive price reaction on the equity side."
Similarly, Steven M. Galbraith, senior analyst for Sanford C. Bernstein & Co., said the worst may be over for the brokerage sector. He said the turnaround would especially favor the larger, international firms such as Morgan Stanley, Goldman Sachs, Merrill Lynch, and Lehman Brothers.
"Historically, these are not terrific summer stocks," he said. "But we may have had the summer in April and May." He added that despite the difficulties of the past two months, he expects the brokerage companies to come through in good shape.
"You saw some of it with Bear Stearns Wednesday, and you'll see it more prominently starting with Lehman on Friday, Goldman Tuesday, and Morgan Stanley on Thursday," Mr. Galbraith said.
Others disagreed. Though all attributed the upward trend in brokerages' share prices to the Bear Stearns earning report, some were cautious about the sector's short-term prospects.
"People are being overly optimistic," said Steven Eisman, an analyst with CIBC World Markets. He argued that the Bear Stearns report included March in its quarter, which was a strong month and as such blunted the impact of April and May.
Mr. Eisman said he is concerned that the problems of the spring will persist into the summer. "We're not going to really know how weak the cycle is until some of the June companies report," he said, adding that with the series of earnings announcements coming swiftly on Bear Stearns' heels, the sector remains unpredictable.
Analysts also said that the Federal Reserve would play an important role in the long-term success of brokerage shares. They cited the widely held belief that the Fed has in recent weeks finally got the market slowdown it had sought.
In addition to the Bear Stearns earnings, the consumer price index, released Wednesday, rose 0.1% in May, offering evidence that the robust economy is not fueling inflation. In its periodic summary of economic conditions, also released Wednesday, the Fed publicly acknowledged that the economy seems to be decelerating.
"I think that we're starting to see some anecdotal signs of a slowdown in the economy, which eases the pressure to raise rates," Mr. Frantz said. "Hence, we start seeing some sort of a rally occur in the financial shares.''