Investors are shrugging off a raft of Merrill Lynch downgrades of banks and brokerages, including

Goldman Sachs

(GS) - Get Report

,

TST Recommends

Morgan Stanley

(MS) - Get Report

and

Wells Fargo

(WFC) - Get Report

.

In a research report issued Thursday, Merrill analyst Guy Moszkowski downgraded Morgan Stanley and Goldman to neutral from buy, citing further deterioration in the credit and mortgage markets. He also broadly lowered the fourth-quarter earnings estimate at investment banks

Citigroup

(C) - Get Report

,

Bear Stearns

( BSC),

Lehman Brothers

( LEH) and

JPMorgan

(JPM) - Get Report

.

Moszkowski's colleague Ed Najarian, covering large-cap banks, also chimed in, slashing his rating on Wells Fargo and

M&T Bank

(MTB) - Get Report

to sell from neutral, writing that a "deteriorating economic backdrop should exacerbate weaker credit fundamentals."

Still, shares of those financial shops were trading higher to down only fractionally.

Much of the negative analyst sentiment is based on the expectation that the economic outlook, driven primarily by the housing market, is expected to get worse before it gets any better.

Indeed, nationwide foreclosures jumped to a record high of 0.78% from July to September, according to the Mortgage Bankers Association, which released a brief on the quarterly mortgage performance on Thursday.

But a lofty government plan spearheaded by Treasury Secretary Henry Paulson that would put a five-year freeze on subprime mortgage rates may be suggesting that the damage wrought by providing mortgages to borrowers with shaky credit is at or near an end.

"We know the fourth quarter is going to suck. That's news to nobody," said Joe Capone, managing member of fund SMaRT Financial Partners and contributor to

Real Money.com

, the

TheStreet.com

's sister site. "I don't think

downgrades drive the stock anymore. What we need to focus on is, do these companies have the right amount of capital," he noted, adding that his outlook was becoming bullish on the financial sector after a raft of downgrades over the past several weeks.

Moszkowski paints a picture of much steeper losses at Bear and Citi. At Bear, he expects a loss of $1.33 a share, from an earlier expectation of a 42 cent-loss. Citi faces a 72-cent fourth-quarter loss up from a predicted 30-cent loss. The analyst's fourth-quarter earnings estimate of Lehman was also lowered to $1.36 from $1.84.

Earnings estimates at Morgan Stanley, JPMorgan and Goldman were roughly unchanged.