Last week's powerful rally in financial stocks slowed Friday, leaving analysts divided on whether a widely expected interest rate increase this week by the Federal Reserve would limit further gains in the near term.
Fears of rising interest rates have long troubled bank stocks, bringing many down to 52-week lows in spite of the banks' generally strong business operations. Recent signs that first-quarter earnings could be strong, coupled with cheap valuations, are likely to keep the "hot money flowing into the sector," traders said.
Several banks announced good news last week, said Nancy Bush, an analyst at Prudential Securities. J.P. Morgan & Co., FleetBoston Financial Corp., and others said they expected strong first-quarter earnings driven by capital markets revenues.
Positive news about bank earnings last week combined with "very low stocks prices is like adding a match to gasoline," Ms. Bush said.
Joan Goodman, an analyst at the Pershing division of Donaldson, Lufkin & Jenrette, said interest rate jitters have been factored into the bank stocks.
It is not likely that the rally in bank stocks will be derailed, Ms. Goodman said. "We do not have any ominous crises on the horizon like troubles in Asia or Y2K, and we are close to reporting first-quarter earnings, which are expected to be strong."
Last week's rally petered out Friday, as investors took profits, and triple witching - when index options and futures expire - and a re-weighting of the Standard & Poor's index made the market more volatile than usual.
Still, some investors continued to buy. Shares of Boston-based State Street Corp. rose 56.25 cents, or 0.66%, to $86.375. Earlier last week, State Street said it expected to beat analysts' first-quarter earnings estimates because of new computer conversions and increased revenues from foreign exchange.
Other high-fliers of the day included Chase Manhattan Corp, which also said that it would have a strong first quarter. Shares of Chase rose 87.5 cents, or 0.97% to $91, hitting yet another 52-week high.
However, some said interest rate jitters would resume their pressure on bank stocks' valuations.
The Federal Reserve is scheduled to meet Tuesday, and many on Wall Street expect another increase in short-term interest rates.
"Each time the Fed raises interest rates, the banks have proceeded to sell off, and investors recognize that the Fed is not finished," said Andrew Collins, an analyst at ING Barings. "So I expect to see a little bit of repositioning in the portfolios in light of the pell-mell in bank stocks that we saw last week."
Michael Mayo, an analyst at Credit Suisse First Boston, was even more skeptical of the sustained buoyancy of bank stocks.
The rally last week was cause primarily by "stocks that were oversold, rotation out of technology stock, and a rally in the bond market, which are factors that are somewhat unrelated to bank fundamentals," Mr. Mayo said. "Our view is unchanged. If you strip the capital markets revenues out of bank earnings, those earnings are under strain."
