The third time was the charm for Wall Street, as a

stronger-than-expected earnings report from

Bear Stearns

( BSC) fueled a big rally Thursday in brokerage stocks.

In midday trading, the Amex Broker Dealer Index was up 4%, far outpacing the solid gains being posted by the broader market indices. The surge in the Broker Dealer Index put most brokerage stocks back in the green for the year.

The big correction in the stock market the past two months had wiped away all the gains for the brokers, many of which were up more than 10% as recently as May 1.

The reason for the sudden turnaround in the brokerage sector was a combination of relatively benign economic data and the surprisingly strong second-quarter earnings announced by Bear Stearns before the opening bell. Bear Stearns, defying predictions that a slowdown in the mortgage market would crimp the Wall Street firm's profits, posted a robust 81% gain in second-quarter earnings.

The big jump in earnings was fueled by a combination of higher revenue from trading, investment-banking work and interest payments by hedge funds and other borrowers of stock.

In the quarter, Bear Stearns earned $539 million, or $3.72 a share, up from $298 million, or $2.09 a share, in the year-ago period. The firm generated record net revenue of $2.5 billion in the quarter, up 33% from a year ago.

The New York-based company blew past the Thomson Financial consensus estimate for earnings of $3.12 a share on revenue of $2.1 billion.

In midday trading, share of Bear Stearns were up $3.54, or 4.4%, to $128.60.

Bear Stearns is the third big investment firm to post stellar earnings this week. But those earlier strong profit reports from

Lehman Brothers

( LEH) and

Goldman Sachs

(GS) - Get Report

were not enough to keep inflation-wary investors from selling brokerage stocks.

For the moment, however, inflation worries are taking a back seat, as investors decide the brokers have gotten too cheap to ignore. Besides Bear Stearns, other brokerage stocks surging on Thursday were Goldman Sachs,

Charles Schwab

(SCHW) - Get Report

,

TDAmeritrade

(AMTD) - Get Report

and

E*Trade

(ET) - Get Report

.

In a morning call with analysts, a top Bear Stearns executive said nothing that would give investors reason to rethink the rally into brokerage stocks. Bear Stearns CFO Samuel Molinaro, unlike his counterparts at Lehman and Goldman Sachs earlier in the week, did not seem too concerned about the impact of the market correction of the firm's business prospects going forward.

"Business conditions are good,'' says Molinaro. He says the impact of the market correction on stocks was "reasonably contained'' and says he does not foresee it having a wider impact on corporate deal-making or bond and stock underwriting.

Some on Wall Street had predicted that Bear Stearns would suffer more than its peers in the second quarter from the impact of rising interest rates. That's because the firm is much more dependent on bond underwriting and bond trading for revenue than its competitors.

In particular, many worried that Bear Stearns' big mortgage-backed securities underwriting business would suffer in light of the slowdown in the mortgage market. But those concerns appear to be unfounded.

"The market has consistently underestimated the earning power of this franchise,'' says Molinaro.

The firm's capital markets division, for instance, took in $2 billion in net revenue, a 40% gain over the prior year. Bond-related activity accounted for $1.2 billion of those net revenue. The firm said the "securitization and trading volumes remained high,'' although it did not break out specific figures.

Investment-banking revenue rose 20% to $278 million.

Another strong line of business was Bear Stearns' clearing operation, which includes its hedge fund prime brokerage group and big stock-lending business. The firm said net revenue from the clearing operation rose 5% to $289.5 million. Bear Stearns says some of the gains were due to more stock borrowing by its hedge fund customers.

Wall Street analysts generally found little to quarrel with in Bear Stearns' results, with many expressing surprise at the strength of its fixed-income line of businesses.

"Our first take is that this was a good quarter, especially given the market dislocations in May,'' says Michael Mayo, a Prudential Equity analyst, in a research note. "We will need to adjust our estimate for 2006 to at least account for the current quarter."