Banks Shoulder a Heavy Load

If the pros are right, financial companies will lead the market in the second half of 2005.

According to Thomson First Call, analysts expect earnings for the financial services sector to rise an eye-popping 25% in the third quarter and a still-robust 17% in the fourth. By comparison, earnings for the entire S&P 500 are expected to rise 15% and 12% in the next two quarters.

Wall Street analysts expect earnings at banks, brokers and insurers to soar in the second half, feasting on a lively mergers landscape, benign monetary policy and a vigorous economy.

It's a rosy scenario and one that should give market bulls reason to cheer as they return from the July Fourth holiday. But it's also a scenario that's fraught with the potential for disappointment, and one that investors should distrust, given the surge in oil and narrowing spread between short-term and long-term interest rates.

For starters, the third-quarter estimates aren't quite as strong as they appear. The third quarter of 2004 was a particularly weak one for the brokerage business and the banking sector, with average earnings rising a modest 3% from 2003. The bar is decidedly low.

It's also worth remembering that the first half of the year has been no barnburner for financials.

In the first quarter, earnings for the financial sector rose 10% compared with the year-earlier period. That was better than most had expected but was in keeping with the broader market.

Not much of anything is expected from financial services companies in the just-completed second quarter. According to the same analysts who predict outsize earnings gains in the second half, the second quarter will be a time of little or no growth for banks and brokers.

Earnings growth will be particularly anemic in the banking sector. Michael Mayo, an analyst with Prudential Equity Group, expects earnings at banks to rise just 2% from a year ago, the slowest rate of growth in three years. The problem for the nation's banks is "sluggish revenue growth,'' something Mayo doesn't see changing soon.