NEW YORK (CNNMoney.com) - Investment brokers can thank Bear Stearns for putting a halt to three days worth of sector stock declines as the seventh largest investment bank posted record second quarter earnings, driven by strength in its institutional equities and fixed income trading businesses.

The company reported second quarter earnings of $539 million, or $3.72 a diluted share, up 78 percent from the comparable period last year and sharply beating analysts' expectations of $3.12 a share, according to Thomson Financial.

Bear Stearns (up $4.30 to $128.50, Charts) revenue jumped to $2.5 billion from $1.9 billion in the second quarter of 2005 and $2.2 billion in the first quarter of this year.

Bear Stearns is the third investment brokerage to report its second quarter results this week, following stellar earnings from Goldman Sachs (up $4.01 to $142.51, Charts) and Lehman Brothers (up $1.86 to $62.77, Charts). But unlike its rivals, Bear Stearns' earnings grew on a quarterly basis even as the markets went into a late-quarter selloff in May.

"Clearly 2Q '06 was a very strong period for Bear, which thus far has provided the best upside surprise of the three," said David Trone, a securities industry analyst at Fox-Pitt Kelton. "We'd expect estimates to increase Street-wide, and BSC shares to outperform the market today."

By comparison, both Goldman and Lehman's stocks took a hit after their earnings reports as the companies warned that a prolonged downturn in the market could hurt the industry down the road. Analysts said Wall Street fears that if interest rates continue to rise and the markets remain volatile, it could slow down equity offerings and put a crimp in earnings.

Investors opted for caution as Goldman and Lehman's equity trading slid from the first quarter - a direct result of some of the market weakness late in the second quarter. Both companies' stocks,however, were trading higher Thursday as Bear Stearn fueled some optimism.

Speaking on the company's earnings call with analysts, Bear Stearn's financial chief Samuel Molinaro said while the company did face some challenges as the markets turned south at the end of May and into June, the difficulties were "reasonably well contained and the business conditions were strong."

Bear Stearns' capital market's division, which includes institutional equities, fixed income and investment banking, reported total revenues of $2 billion, up 20 percent from the first quarter and 40 percent from the comparable period in 2005.

And Molinaro said the company's investment banking pipeline is also strong and, barring any prolonged market volatility, he was confident that the company's calendar of equity offerings will materialize, providing a solid revenue boost for Bear Stearns.

While the company's is up over 31 percent from its year lows, its had a rough run over the past few months, falling 12 percent from its 52-week high in April.

"The market has consistently underestimated the earnings power of this franchise," Molinaro said. "Each quarter we demonstrate how significant our earnings capacity is."

In particular, he said investors were continuing to be bearish on the company's mortgage business despite continued strength in its mortgage securitization franchise. That business produced record revenues in the second quarter and contributed to the growth in the fixed income unit, which posted revenues of $1.2 billion.

Bear Stearns said its fixed income trading volumes remained high and its derivatives and foreign exchange operations both reached record revenue levels fueling some of the strength in capital markets.

But its wealth management unit accounted for some weakness in the quarter as a drop in performance fees on the company's proprietary hedge funds hit its asset management revenues. Asset management net revenues tumbled 56 percent from last year to $22 million.

"We had a tough quarter [in asset management] after having a remarkably strong quarter in the first quarter," Molinaro said. "It's somewhat non-recurring [and] not indicative of the strength in the franchise."

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