NEW YORK (CNN/Money) -
A trio of brokers -- Lehman Bros., Bear Stearns and Morgan Stanley -- deliver their first-quarter earnings this week and from all accounts, the news should be upbeat.
"I expect the numbers to be very good," said Kenneth Worthington, a financial analyst at CIBC World Markets who covers the sector. "We're in the sweet spot right now where fixed income isn't deteriorating that much and equity markets are holding up."
Worthington said that even the current eight-week period declines in equities has been positive for the brokerages because increased volatility means increased trading activity. In addition, the surge in the fixed income market has been a major boon for the Wall Street banks during the quarter.
"Analysts have been raising estimates over the last three or four weeks as they've realized that fixed income was stronger than expected in the quarter," said Jeffery Harte, a financial analyst at Sandler O'Neill & Partners who covers the companies.
Susan Roth, an analyst at Credit Suisse First Boston who covers the sector, wrote in a recent note that the stronger-than-expected fixed income surge in the first quarter, and a good start to underwriting revenue and M&A activity in 2004, led her to raise estimates on the individual stocks and the sector as a whole.
"The first quarter is seasonally always the strongest, but coming off the huge year we had in '03, people figured it (fixed income) would be fine, but nothing great," Harte added. "But it's done much better than expected, and that's important for these banks."
The fixed income market soared in the first quarter -- as it did in the fourth quarter of 2003 -- as investors sought to find a safe-haven place to put their money on the heels of some less-bullish than hoped for economic news. The continued low interest rate environment -- due in part to the still-lagging labor market and lack of inflation worries -- has also made fixed income more attractive to investors.
Although analysts said it was not likely that the Federal Reserve would raise the Fed funds rate this year, they did acknowledge there was some concern that the fixed income boon would have to edge back in 2004, particularly in the second half of the year. The Fed funds rate, an overnight bank lending rate, currently stands at 1.0 percent, a low for more than 40 years.
Roth noted that her firm's overall 2004 estimates account for increases in trading volume, equity underwriting and M&A that are closer to the historical average than in 2003, and an inevitable slowdown in fixed income.
However, analysts believe the continued volatility of equity markets and eventual return to rising stocks would help counteract a pull back in fixed income and the rising interest rate environment.
Harte said he would be looking for all the companies to say that M&A activity is continuing to accelerate, as it has in the last quarter.
"Underwriting revenues and M&A activity picked up as 2003 progressed; 2004 is off to a strong start," Roth wrote in a recent note.
She thinks that Goldman Sachs and Morgan Stanley should benefit from revenue and earnings accrued through investment banking. In December, Morgan Stanley beefed up its banking team to prepare for an expected rise in investment banking business in 2004.
Lehman, Bear Stearns, Morgan Stanley
Last quarter, the three Wall Street firms all posted earnings that grew sharply from a year earlier, and they are expected to do the same this quarter.
Lehman Bros. (LEH: Research, Estimates), due Tuesday, is thought to have earned $1.66 per share, according to First Call estimates, versus $1.15 a year earlier, which would represent growth of 44 percent.
What separates Lehman from the other two Wall Street banks reporting this week, the analysts said, is that it is not as well-diversified and is more dependent on fixed income and equity trading than the others.
Harte said he has questions about how Lehman is positioning itself for the next stage of the economic recovery and an eventual pick up in interest rates. Specifically, in the second half of 2004 and beyond, he has some questions about whether Lehman has built up its equity and M&A activity sufficiently to thrive.
Worthington says Lehman Bros., more than Bear Stearns or Morgan Stanley, is more likely to see weaker year-over-year comparisons in the second half of the year.
On Wednesday, Bear Stearns (BSC: Research, Estimates) is expected to report earnings of $2.05 per share, three percent more than the $2 it earned a year earlier. In the fourth quarter, the company reported earnings per share that rose 61 percent from the year-earlier period.
On Thursday, Morgan Stanley (MWD: Research, Estimates) is expected to say it earned 96 cents per share, up 17 percent from the 82 cents per share it earned a year earlier.
In the fourth-quarter, Morgan reported earnings per share and revenue that grew from a year earlier and topped estimates on an EPS basis but not a revenue basis.
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