Shares of some of the biggest U.S. banking companies dipped Wednesday afternoon after the Fed announced the sixth interest rate cut since the beginning of the year, indicating some disappointment and signaling that the outlook for the remainder of the year was not turning any rosier.
The Federal Open Market Committee cut rates by a quarter-point, putting the federal funds rate at a seven-year low of 3.75%. The Fed also said it sees continued risk of a slowdown. Some observers had been looking for a half-point reduction in rates. Several large banks and brokerage companies have announced earnings warnings for the second quarter and the year because of a weakening economy.
The American Banker index of the 50 largest banks fell 0.08% on Wednesday, and its index of 225 bank stocks rose 0.50%, while the Dow Jones industrial average fell 0.36% and the Nasdaq composite rose 0.49%.
Analysts said things look worse for the third quarter, because it falls mostly during the traditionally slow summer months, and added that a significant fourth quarter bounce back is unlikely. David Berry, research director at Keefe, Bruyette & Woods, said 2002 earnings estimates indicate that conditions might improve, but things now appear to be slowing down in the capital markets firms. On the brighter side of the financial sector are credit card companies most notably Providian Financial Corp. and small banks, Mr. Berry said. Smaller banks, which are not as impacted by capital markets activities, have been outperforming other groups.
Theyre doing pretty well this year due to the aggressive Fed easing, the lack of participation in corporate loan problems that bedevil larger banks, and a continued pace of mergers and acquisitions activity, Mr. Berry said.
They havent delivered the earnings warnings that some larger banks have.
However, Mr. Berry said he has not ruled out all large banking companies this year, rating BB&T Corp., Fifth Third Bancorp, and Comerica Inc. as market outperform.
Mr. Berry also said Citigroup Inc. will gain strength, despite its broker-dealer business, from its steady consumer lending businesses.
Regional brokerage companies may be the next industry sector to show the pinch of market conditions. The group was downgraded Wednesday by Keefe Bruyette. Fed rate cuts have not helped business flow in general, Lauren Smith, a brokerage analyst at the firm said. Im not looking at todays rate cut as a potential catalyst for [regional brokerage firms] stocks, she said. Fundamentally financial stocks will probably not be affected, emotionally it may have an impact.
On Wednesday, a day after Merrill Lynch & Co.s earnings shortfall pre-announcement, Ms. Smith cut 2001 earnings estimates for several regional brokerage companies, citing a continued slowdown in retail investing. June has been the weakest month this quarter for retail activity, which continues to be hampered by the negative and uncertain market sentiment, she said.
Retail investors remain cautious and the negative wealth effect has weighed on psychology, she said. Theyre waiting for the clouds to clear in the retail environment and we dont see that happening right now. 
