The already subdued earnings outlook for the investment banking sector got a little gloomier Wednesday as leading Wall Street analysts sharply cut back profit estimates on the group's major firms.

Judah S. Kraushaar, an equity analyst with Merrill Lynch & Co., slashed his estimates on Goldman, Sachs & Co., Morgan Stanley Dean Witter, and Lehman Brothers. In each case he cited persistence of problems that hampered the industry last quarter. Those include weakness in equity underwriting and mergers-and-acquisition business, and a continued absence of retail investors from the market. He also raised concern over the possibility of more losses stemming from the private equity business.

"Retail investors appear frozen as trading activity has plummeted," Mr. Kraushaar wrote in a research note. The reductions took Mr. Kraushaar's estimates 15% below the Wall Street consensus for both Goldman and Morgan Stanley and 7% for Lehman.

Mr. Kraushaar cut 6 cents from his forecast for Goldman's first-quarter earnings per share, to $1.18, and 15 cents from his projections for the year, to $6 a share.

His 2001 outlook for Morgan Stanley, however, suggested that Mr. Kraushaar sees at least some promise for the sector. After cutting 9 cents from his projected first-quarter earnings per share for Morgan Stanley, Mr. Kraushaar trimmed his forecast for the year by just 5 cents, to $4.40 a share.

Other analysts were even more severe.

Diana Yates of A.G. Edwards & Sons chopped 21 cents off her per-share forecast for Morgan's first quarter, to 95 cents, and 79 cents from full-year projections, to $4.21. Ms. Yates trimmed 10 cents per share from her first-quarter projections for Goldman, to $1.23, but cut her expectations for the full year by 47 cents, to $5.24.

Another analyst, Guy Mozkowski at Salomon Smith Barney, cut Morgan Stanley by a full 55 cents for the year, to $4.40, trimming first-quarter earnings by 13 cents.

Merrill Lynch itself was not immune from scrutiny. Amy Butte, an analyst at Bear, Stearns & Co., said Merrill may have a bit of a struggle this year.

In a research note Wednesday, Ms. Butte said Merrill is not guaranteed margin growth this year, since margin expansion depends on both revenue growth and expense management and reallocation. "Revenue growth in 2001 may be difficult to achieve and we do not expect wholesale expense cuts," she wrote. Her model looks for flat earnings on 3% revenue growth at Merrill for the year.

But analysts are not advising investors in brokerage and investment banking stocks to bail out just yet.

Indeed, Mr. Kraushaar told investors that "broker-dealer stocks could stage a solid recovery," thanks to a lower interest rate environment.

Others agreed that further interest rate cuts could help to stabilize earnings and foster market optimism, which then should create opportunities for the underwriting and merger market.

And fixed income, which has resurged as investors have shunned equities, remains a bright spot, analysts said.

Still, Ms. Yates noted that the second quarter could be worse than this one. The lack of time between deals' announcement dates and when the commissions show up in the books could affect revenues into the next period, she said.

Also, the second quarter will reflect the full drag of this year's quiet merger and underwriting market, Ms. Yates said. And even if the economy picks up, earnings might not improve until the end of the year, she added.

On Wednesday, Morgan Stanley lost 6.5%, to $65.13; Goldman 6.7%, to $91.75; Lehman 6.15%, to $68.65; and Merrill Lynch 4.47%, to $59.90.

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