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NEW YORK (CNN/Money) – It's a big week for Wall Street on Wall Street.
Investment banking firms Bear Stearns (Research), Lehman Brothers (Research), Morgan Stanley (Research) and Goldman Sachs (Research) are all on tap to post their first quarter results.
Based on the way the four stocks have performed lately, you'd think that the companies would report gangbuster results. Shares of these brokerages are up, on average, 17 percent during the past six months.
But some analysts are concerned that the banks, which reported stellar results last year in large part due to healthy increases in revenues from their fixed-income divisions, could be in for some tougher times ahead.
Morgan Stanley is the only one of the four banks reporting this week that is expected to report an earnings increase for the quarter.
"This is the first quarter in a long time where you will see year-over-year comparisons that are negative," said David Trone, an analyst with Fox-Pitt Kelton. "And we'll probably see results for most of the quarters in 2005 being down on a year-over-year basis."
So far this year, the stock and bond markets have been relatively flat and after a hot start, activity in the initial public offering market has cooled. The one area that has held up is the lucrative area of merger and acquisitions.
"In general, this should be a mixed quarter," said Richard Bove, an analyst with Punk, Ziegel. "Clearly, M&A is strong but the IPO market has slowed down, the equity market is weakening and the fixed income market is limping along."
For this reason, Bove said that the two companies that have the best chance of reporting better than expected results are Morgan Stanley and Goldman, which typically are among the leaders in the merger advisory business and took part in some of the biggest deals of the past few months.
Goldman was one of the advisors to Gillette in its sale to Procter & Gamble and also advised Nextel in its merger with Sprint.
Morgan Stanley advised Guidant in its sale to Johnson & Johnson and also advised utility PSEG in its sale to Exelon.
Boom or bust for big brokerages?
But given this mixed forecast for the big investment banks, are the stocks worth buying?
The four companies reporting earnings this week all trade at about 12 times earnings estimates for 2005, a price that Bove said is reasonable. He admits that earnings are likely to be volatile this year but said that over the long haul, the big investment banks should capitalize from the continued growth in the financial services industry worldwide.
"If you believe this a secular story then you should ignore cyclical swings," said Bove. "The banks may have bad quarters every now and then but so what?"
Still, there are some near-term risks. In a recent report, Bernstein analyst Brad Hintz wrote that one of the biggest factors driving the solid performance of brokerage stocks is an expectation that the companies' investment banking businesses will keep sizzling. So for the stocks to keep rising, the heady pace of M&A activity will probably need to continue.
And with interest rates expected to rise further this year, that could put a damper on bond trading as well as underwriting fees for new debt securities.
"The chances to make money in the bond market will be significantly more challenging this year," said Trone.
With all this in mind, earnings for the full year are expected to decline this year for Bear, Lehman and Goldman and increase by just an average of 6 percent for the group in 2006. By way of comparison, earnings surged an average of 31 percent for the group last year. So Trone said the stocks might not be as much of a bargain as they would appear.
"The periods of big earnings increases are gone so the stocks are pretty fully valued," Trone said.
For more news about the markets, click here.
Bernstein's Hintz owns shares of Morgan Stanley but his firm has no banking ties to the companies mentioned. Other analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking ties with the companies.
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