There's a big party under way in the stock market, with bank stocks prominent among the revelers.
Indeed, bank stocks arrived early to the festivities, outpacing the Dow Jones industrials for much of last week, and more or less keeping pace the first two days of this week.
Now some observers are worried that the banks may soon run out of steam.
They say the favorable economic data that so helped bank stocks a week ago are evidence that the economy is stronger than expected. And that means bank earnings could finally fall behind the pace of other corporate earnings after outdistancing nearly all others over the past two years.
The Dow Jones industrial average calmed down late Tuesday after a hot day-and-a-half of trading. This week it has risen 2.2% and soared past the 7,000-point mark again. While banks have hardly collapsed, the Standard & Poor's bank index has cooled down from last week's 9.3% surge, gaining 1.6%.
"The biggest contributor to banks' performance is that they did so well a week ago," said Catherine Murray, bank analyst at J.P. Morgan Securities Inc. "And there's still uncertainty on the interest rate front, and as long as there is, the upside for banks is somewhat capped."
While bank stocks seem capable of resuming their ascent until the Federal Reserve's Open Market Committee meets again this month, they could hit an air pocket if interest rates rise further, as many on Wall Street expect.
"The economy is stronger now than the last time the Fed raised interest rates," observed David Shulman, chief market strategist at Salomon Brothers. "So we think rates will go up again, and we're bearish on banks in general."
This fear of rising interest rates has some analysts starting to worry about bank earnings for the rest of this year.
"Earnings at many corporations are being revised upward," said Thomas M. McCandless, bank analyst at Natwest Securities. "Estimates at banks are mostly down or flat."
A survey by Smith Barney Inc. of analysts who cover the 44 largest banking companies showed analysts cutting or maintaining their earnings projections at 31 companies.
With the notable exception of Wells Fargo & Co., which was punished for its acknowledged difficulties in absorbing its merger with First Interstate Bancorp, projected earnings at most banks were cut due to fears over future interest rate hikes.
Despite this dubious long-term outlook, investors were quick to return to banks after earnings were released last month, erasing memories of the beating bank stocks took after interest rates rose.
To some degree, banks can protect their stock prices by buying back shares from investors. NationsBank Corp. seems to have done this, for example. The superregional's shares slipped less than those of other banks during the April selloff because of the "substantial amount of stock it is purchasing following the Boatmen's Bancshares acquisition," Morgan's Ms. Murray wrote in a recent report to investors.
But while buybacks may help the largest banks keep their share prices from falling too far, Mr. McCandless believes ongoing investor concern about interest rates will prevent the banks from matching last year's thrilling heights.
"The bloodbath in April caused a lot of psychological damage" that may just now be starting to manifest itself, he said. "Most portfolio managers won't sell during such a downdraft; they wait for the stocks to recover and then sell," he said. "So when the banks start reaching their historic highs, there will be downward pressure on them."
But Deutsche Morgan Grenfell banking analyst Joel W. Silverstein thinks that bearish outlook is an overreaction.
"I'm confident Citicorp and NationsBank will retrace their steps and break through to new highs," he said. "As soon as people start looking at earnings, they'll see banks still have double-digit growth, regardless of the interest in technology stocks right now."
And investor fixation with technology and other stocks posting higher- than-expected earnings shall pass, analysts confidently say.
"With earnings now behind banks, other sectors are more visible," pointed out Frank J. Barkocy of Josephthal, Lyon & Ross Inc. And J.P. Morgan's Ms. Murray acknowledged "there isn't much news" to capture investors' attention.