Updated from 9:29 a.m. EST

Lehman Brothers ( LEH) added a big improvement in merger advisory fees to its already strong trading results in the second quarter, doubling net income and wiping out analysts' forecasts.

The bond powerhouse, traditionally the first of the big Wall Street firms to report quarterly results, earned $670 million, or $2.21 a share, in the quarter, compared with $301 million, or $1.15 a share, last year. Analysts had been forecasting earnings of $1.64 a share, according to Thomson One Analytics.

Analysts expect similarly strong numbers from Bear Stearns ( BSC), Morgan Stanley ( MWD) and Goldman Sachs ( GS) when they report over the next few days.

At Lehman, second-quarter revenue from investment banking was $508 million, up 39% from last year. Much of that gain came from a spike in merger and advisory work and stock underwriting.

The company continues to make a killing in the bond market. Revenue from principal transactions totaled $1.78 billion in the quarter, a 131% jump compared to a year ago. The firm said revenue from fixed-income trading, which is included in principal transactions, rose 80% in the quarter.

Overall, net revenue rose 84% to $3.1 billion.

David Goldfarb, Lehman's chief financial officer, said despite the recent correction in the stock market, the firm is bullish about its prospects.

"The recovery has begun in M&A and equities,'' says Goldfarb. He said the pipeline of corporate mergers the firm is advising on is at the highest level in three years.

Total noninterest expense, which includes salaries, rose 66%, to $2.1 billion. Some of that increase went to cover the cost of adding 300 new employees during the quarter, another bullish sign.

The first-quarter numbers reflect Lehman's acquisition last year of money-management firm Neuberger Berman.

Lehman shares, in late morning trading, were up 65 cents, to $85.30. The stock is up 10% this year and up 62% since the end of 2002.

Brokerage stocks, as a group, have been on a big run the past year, outpacing the overall market. The AMEX Broker Dealer Index is up 65% since the end of 2002.

In many ways, the brokers are operating in a sweet spot right now.

Wall Street firms continue to benefit from low interest rates, something that's fueled the demand for bonds and other fixed-income products. At the same time, the revival in the stock market -- notwithstanding the recent correction -- is waking up the market for corporate deal making and initial public offerings from a three-year hibernation.

David Trone, a Prudential Securities financial services analyst, says for the near term, it's a Goldilocks scenario for the securities industry.

But there are a few wrinkles in the rosy outlook for brokerage stocks.

If the jobless recovery continues for much longer, consumers could start to rein in spending, and that could cause the revival in corporate profits to falter. A drop in consumer spending would send Wall Street into a tailspin.

Analysts also continue to wonder how long Lehman and other brokers can rely on bond trading for the lion's share of their revenue growth. In a Tuesday morning conference call, analysts peppered Goldfarb with questions about the firm's outlook for bond trading in the coming quarters.

Goldfarb said the firm expects fixed-income trading to remain strong as long as the Federal Reserve holds the line on interest rates. But he acknowledged that the surge in bond trading revenues eventually will level off.