A surge in market volatility after Japan's worst earthquake on record and a jump in oil prices may not be enough to keep investment banking and trading revenue from falling for another quarter.

Analysts have cut first-quarter earnings estimates at the biggest U.S. banks, saying trading revenue may not rebound as much as expected. That outlook fuels speculation that Wall Street is facing a prolonged decline in investment banking and trading revenue after record figures in 2009.

Though companies often benefit from higher volatility and volume, an 18% drop in the Nikkei 225 Index in the three trading days starting with Japan's March 11 earthquake may be a negative for Wall Street as banks faced principal losses and nervous investors scaled back trading, analysts said.

"In the very short term, that volatility can have a beneficial effect, but when this comes after what's been a volatile few years, it ultimately leads to more investors sitting on the sidelines again," said Richard Staite, an analyst at Atlantic Equities.

First-quarter earnings per share at the largest U.S. firms by investment banking and trading revenue — Goldman Sachs Group Inc., JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Morgan Stanley — may fall 23% from a year earlier, according to the average of 104 estimates by analysts surveyed by Bloomberg.

Total investment banking and trading revenue at the five banks may drop 25% from a year earlier, according to Chris Kotowski, an analyst at Oppenheimer & Co.

The banks are likely to bounce back from the fourth quarter, when they posted combined revenue of $21.1 billion from investment banking and trading. That was the lowest since the fourth quarter of 2008. Spokesmen for the banks declined to comment.

While more trading due to global events likely boosted commissions, most big banks likely had principal losses of a "few hundred million dollars" after the earthquake, said David Trone, an analyst at JMP Securities LLC. "Sometimes those general rules have exceptions, and the acute velocity of the decline in Japan over the first few days was something where losses were inescapable," he said.

Morgan Stanley's profit may be hurt by a trading loss at a Japanese partnership with Mitsubishi UFJ Financial Group Inc. The venture may post a loss of $951 million from bond trading, The Wall Street Journal reported last week. A spokesman for Morgan Stanley, which owns 40% of the venture, declined to comment.

After reporting record investment banking and trading revenue in 2009, banks had declines in those businesses for three straight quarters compared with year-earlier periods. A fall in fixed-income trading revenue, the biggest capital markets business for the banks, largely spurred the decreases.

Fixed-income revenue at the five U.S. banks and four international rivals — UBS AG, Credit Suisse Group AG, Barclays PLC and Deutsche Bank AG — fell to $101 billion last year, from a record $146 billion in 2009, said Glenn Schorr, an analyst at Nomura Holdings Inc.

David Viniar, Goldman's chief financial officer, told investors in February that 2010's fixed-income decline would likely end. Revenue from fixed income, currencies and commodities, fell 37% at Goldman last year.

First-quarter results "could fuel concerns that the tepid pace of the capital markets recovery coupled with new regulation will impair earnings growth for the capital market banks in 2011," said Brad Hintz, an analyst at Sanford C. Bernstein & Co. "Risk aversion still pervades the market." Hintz cut his first-quarter estimates for Goldman and Morgan Stanley in a March 29 note. He does not cover the other three banks.

Atlantic Equity's Staite said the revenue decline could be more enduring. "In the aftermath of the financial crisis, you're going to have a sustained period of uncertainty," he said. "You could argue that it's at least a semipermanent decline in revenue. It could take a few years before we start to rebuild toward the high levels we saw previously."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.