Bank stocks surged for the second week in a row, but analysts were not yet ready to declare it the beginning of a long-term rally.
The American Banker index of the 50 largest banks was up 5.34%, following a 21.5% leap the previous week.
"The rally in the bank stocks has led the way for the overall stock market to go to new heights," said Michael Mayo, an analyst at Credit Suisse First Boston in New York. He cautioned, however, "The factors contributing to the rally are technical and transient and not indicative of long-term performance."
The short-term investors who had been betting on the technology sector are now putting their money on bank stocks in anticipation of strong earnings, but the rally is likely to cool as soon as earnings come out and these investors move their chips to another sector.
"Some of the earlier weakness in bank stocks came from investors moving from the Old Economy, value stocks, to a New Economy of technology stocks," said Raphael Soifer, chairman and founder of the strategic consulting firm Soifer Consulting LLC. "That shift is reversing to some extent as the boundaries are blurring," as banks enter the technology sector more aggressively, he said.
"Banks went from darling to pariah as investors moved to the Internet, but when there was a crack in the [technology] bubble, they looked for other opportunities," said Eric Rothmann, an equity analyst at First Security Van Kasper in San Francisco, suggesting the bank rally will conk out.
The positive earnings reports released by the investment banks Lehman Brothers and Morgan Stanley Dean Witter & Co. foreshadowed strong reports by the banks, according to many analysts.
Mr. Soifer also attributed the recent rally to lessening concerns about rising interest rates after the Federal Reserve Board's moderate raise of one-quarter of a point on Tuesday.
Though markets welcomed the news, some analysts said they expect that the Federal Reserve Board will raise rates again. Economic data released Friday (see story below) sparked fresh worries about interest rates, resulting in a selloff in Treasury securities and bank stocks. The American Banker index was off 0.75% for the day.
Mr. Rothmann said banks rallied because they were seen as undervalued. "When you have a company that has earnings per share that are up 15% and its price-earning is at 7, logic would dictate that it is an undervalued entity."
He said that such thinking would continue to propel bank stocks, but only for a few weeks more.