Concerns over rising interest rates and geopolitical uncertainty kept retail investors out of the market in the second quarter, and no one paid more dearly for that than online brokers.

But some investors are starting to ask whether all the bad news has already been priced into the shares.

There's little doubt that Ameritrade ( AMTD), E*Trade ( ET) and Charles Schwab ( SCH) will report sequential declines in profit growth next week.

Ameritrade, which is due to report fiscal third-quarter results on Tuesday, has warned that earnings would come in at, or near the low end of its guidance range of 14 cents to 22 cents a share. Analysts surveyed by Thomson First Call are now forecasting a 15-cent profit compared with 19 cents in the first quarter and 12 cents last year.

Schwab CEO David Pottruck also has tempered analysts' expectations, saying that "client engagement has weakened" and that it will be hard to improve year-over-year earnings in the second quarter. Analysts said the company's decision to slash commission prices in May also hurt results. Schwab, which will report earnings at "mid-month," is expected to earn 9 cents a share, down from 12 cents in the first quarter and flat with last year.

As for E*Trade, earnings are expected to be slightly less volatile due to the company's bank and mortgage operations, but analysts are still forecasting a 17% sequential profit decline. Thomson First Call projects that the firm will earn 19 cents a share on Tuesday compared with 23 cents in the first quarter and 14 cents last year.

"While we typically anticipate a seasonal summer slowdown in retail trading, we were somewhat surprised by the early timing and magnitude of May's decline in daily average revenue trades," said J.P. Morgan analyst William Tanona.

Daily average revenue trades, or trades on which brokers earn a commission, are expected to fall sequentially about 20% for the second quarter at the major online brokers.

Richard Repetto, an analyst at Sandler O'Neill, said trading was subdued because of concerns about terrorism, higher oil prices, a slowdown in the economy and rising interest rates. "We don't expect any upside surprises," he said.

Unfortunately, trading volume isn't expected to pick up significantly in the current quarter either, which could lead the brokers to issue cautious guidance next week.

"The seasonally weakest period is from April 1 through the end of August," said Charlotte Chamberlain, an analyst at Jefferies. "No one has any expectations that this group of companies is going to do well in the third quarter."

Still, Chamberlain said these stocks are now trading at attractive valuations, having fallen sharply this year. Since peaking at $15.40 in February, E*Trade has declined 35%. Ameritrade, meanwhile, has skidded 45% from its high in January and Schwab has plunged almost 40%.

Tanona said Ameritrade's price/earnings multiple is about 37% below its three-year historical average. He also noted that the company bought back 7.6 million shares, or about 2% of its outstanding stock during the first two months of the second quarter.

"Although Ameritrade will likely remain volatile over the next few months owing to the traditional slow summer retail trading environment, we believe the stock's current valuation already incorporates such a slowdown," he said.

Tanona said he is also becoming "increasingly positive" on Schwab because at just 2.6 times book value "there is limited downside risk." Other analysts think E*Trade is appealing right now because it is more diversified than its peers and trades at a low relative valuation.

"Improved efficiencies, share buybacks, and upside surprise from the bank's spread operations should support earnings as trading volumes decline during the summer months," said Friedman Billings Ramsey analyst Matt Snowling.

E*Trade sports a P/E multiple of 12, based on this year's earnings. That compares with 15 for Ameritrade and 20 for Schwab. Analysts are expecting earnings-per-share growth of 14%, 17% and 26% for E*Trade, Ameritrade and Schwab, respectively, next year.

"The risk-reward is definitely in favor of the online brokers," said Repetto. "We think eBrokers are the best investment when market conditions/volumes are the worst."

While investors will be listening for any comments about the outlook for trading activity on the upcoming conference calls, they also will be looking to Ameritrade and Schwab for clarification on a couple of other issues.

One of the reasons behind Ameritrade's sharp price decline in recent months has been speculation that CEO Joe Moglia might retire. Moglia has helped turn the company's fortunes around since he was hired in 2001 and talk of his departure has made some investors nervous.

Meanwhile, recent news reports have suggested that Schwab is trying to sell its Soundview Capital Markets unit, which includes institutional trading and research. Schwab acquired Soundview just eight months ago and is expected to book a loss on the sale, indicating that the company's management made a strategic error, newspapers have said. Schwab declined to comment on the matter.

At the close of trade Friday, E*Trade was down 0.3% at $9.99 while Schwab was down 0.6% at $8.40 and Ameritrade fell 0.9% to $9.71.

(J.P. Morgan has a banking relationship with Ameritrade and has provided non-investment banking services to Schwab. Friedman, Billings Ramsey has a banking relationship with Ameritrade and seeks investment banking business with E*Trade and Schwab. Sandler O'Neill has banking relationships with the online brokers. Jefferies has no banking relationship with E*Trade).

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