Bank-stock bulls staged a parade Wednesday.
Bank stocks soared, rallying around Wells Fargo & Co.'s better-than-expected earnings. The KBW Bank Index shot up 17%, the biggest one-day gain in its 16-year history.
Wells said its second-quarter net income fell 23% from a year earlier, to $1.75 billion, or 53 cents a share, but it beat the average analyst estimate by 3 cents and Wells raised its dividend by 10%. It reported that its 16% increase in revenue showed strength across several business lines that will allow it to weather the credit crisis. Wells shares jumped 33% Wednesday.
Boosted additionally by regulators' steps to minimize short-selling of financial stocks, the KBW Bank Index, which had lost more than 10% over Monday and Tuesday, more than gained back the week's losses on Wednesday.
Financials bolstered the broader markets. The Dow Jones industrial average and the Standard & Poor's 500 each rose 2.5%.
Investors shrugged off festering concerns about loan losses and bank failures, traders said, and bought up a wide range of bank stocks, including shares of companies hard hit by the mortgage meltdown. BankUnited Financial Corp. rose 104%, Downey Financial Corp. 66%, Washington Mutual Inc. 26%, National City Corp. 22%, and Wachovia Corp. 16%.
"It was a broad-based rally, benefiting almost everybody," Daniel Tachiera, head trader at Hoefer & Arnett Inc. in San Francisco, said in an interview.
The optimism surrounding Wells extended to other bellwether large-cap companies. Bank of America Corp. rose 22% and JPMorgan Chase & Co. 16%.
Even the deep pessimism about the mortgage giants Fannie Mae and Freddie Mac, whose shares had been on a weeklong skid, let up Wednesday. The Securities and Exchange Commission said Tuesday that it would take emergency steps to minimize short-selling of the two companies' stock, and on Wednesday it said it would move to apply those tougher rules to 17 other heavily traded financial stocks. Fannie rose 31% Wednesday and Freddie gained 30%.
Marshall & Ilsley Corp. swung to a second-quarter loss of $394 million, compared with a profit of $220 million a year earlier, and reported an $886 million loan-loss provision. Its shares rose 17% nevertheless.
Despite Wednesday's gain, the KBW Bank Index is down 10% for the past month because of expectations of dismal earnings reports and a string of gloomy outlooks from analysts.
Meredith Whitney, an Oppenheimer & Co. analyst, said on a conference call Tuesday that bank stocks will slump over the course of the third quarter. She said banks must further mark down their assets to mesh with investors' collective view of financial stocks' value. "There needs to be considerable revaluations," she said.
Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets, warned Monday that as many as 300 banking companies could fail over the next three years.
And the broader markets' gains were held in check by inflation fears. The Labor Department said Wednesday that the consumer price index rose 1.1% in June; it was the biggest monthly jump in 26 years and was attributed to escalating fuel and food prices.
"I think it's safe to say what happened with financials today was a very strong rally, but I don't think we're ready yet to start thinking this is sustainable," Lou Brien, a market strategist at DRW Trading Group in Chicago, said in an interview Wednesday. "It's a very volatile part of the market, and with inflation and everything else all over the place, it's hard for people to get in and stay in with stocks in general."