Updated from 8:23 a.m. EDT

Lehman's

(LEH)

second-quarter earnings rose 47% from a year ago, topping estimates on across-the-board revenue growth in investment banking, trading and asset management.

Lehman earned $1 billion, or $1.69 a share, in the quarter, compared with $683 million, or $1.13 a share, a year ago. Second-quarter revenue rose 35% to $4.4 billion. On average, analysts were forecasting earnings of $1.61 a share on revenue of $4.2 billion in the most recent quarter.

The company's biggest unit, capital markets, where Lehman makes markets, structures derivatives and provides brokerage services to institutional clients, had revenue of $3.1 billion in the quarter, up 38% from a year ago. Revenue on the unit's equity side rose 85% to $878 million, while revenue in fixed income rose 25% to $2.2 billion.

Equity capital markets "were driven by higher trading volumes in the cash businesses and improved results in the global derivatives and prime brokerage businesses," the company said. Debt capital markets had "strong results across all products, including credit, municipals, real estate, mortgages and interest rate products."

In investment banking, revenue rose 28% to $741 million, while revenue in investment management rose 25% to $472 million. Investment banking results "were driven by strong advisory and equity underwriting revenues, partially offset by a decline in debt underwriting."

Lehman's earnings beat analysts' expectations for the second quarter in a row. But Wall Street wasn't impressed. While the earnings were strong, concerns have set in that the economy is about to take a turn for the worse.

Lehman shares fell $3.29, or 5%, to $62.32, dragging down other brokers.

Goldman Sachs

(GS) - Get Report

was falling $2.36, or 1.6% to $147.53;

Morgan Stanley

(MS) - Get Report

was falling 76 cents, or 1.3%, to $58.43; and

Merrill Lynch

(MER)

was down $1.85, or 2.6%, to $69.22.

While Lehman's earnings were good, the market, as is always the case, was more interested in its future prospects.

"It's clear that the market is looking for other factors," Rickard Bove, equity analyst at Punk Ziegel & Co. says.

Lehman chief administrative operator David Goldfarb said on a conference call that the quarter was a "tale of two environments." The second quarter started off the way the first quarter ended: positive. But global uncertainty set in toward the end of the quarter, Goldfarb said, as the European Central Bank became more hawkish, the

Federal Reserve

looked less likely to stop raising rates, and the market dealt with "stubbornly high" oil prices.

Clients became more defensive, moving away from equity risks and reallocating their money in more stable investments, such as government bonds. While clients were more caution with their risk taking, Lehman benefited from volatility, as the markets "forced a recalibration" and clients had a "reallocation of assets," according to Chris O'Meara, chief financial officer. As the market turns, Lehman, and the other brokers, will benefit from market volatility.

"Everyone is making money on volatility," Harrell Smith, manager of the institutional securities and investments group at Celent, says. "Volatility has really only picked up in the last six months or so."

But Lehman has also done a good job of varying its business, Smith says, which may help it in the coming quarters if the equity market turns back to positive levels.

"The company has made a concerted effort on the management level to focus on other areas outside their core fixed income strengths," says Smith.

Over the past few quarters, Lehman made efforts to boost the equity trading business and diversify from fixed income. Its change in concentration has paid off. In the second quarter, equity capital markets revenue increased 85%, and the division is slowly catching up to the fixed income business. In the second quarter last year, equity capital markets made up 21% of the total capital markets revenue and this year it made up 28%.

In its investment banking business, management said it needed to "keep an eye" on the pipeline for deals, as worsening market conditions could "delay or defer transactions." The company hasn't seen a drop off in deal flow yet, but it could see some transactions "start to fall off the table" as the equity market declines.

In other businesses, private equity and merger arbitrage was down this quarter. But those losses were largely mitigated by the gains that company received from the sale of its seats in the

New York Stock Exchange

(NYX)

.