Bank stocks rallied Tuesday, after the first batch of fourth-quarter earnings news contained few negative surprises. In late afternoon trading, the Philadelphia KBW Bank Index rose 1.6%, twice the gains posted by the S&P 500 and the Dow Jones Industrial Average. The bank index posted its best performance of the year on Tuesday. One of the biggest gainers on the day was Bank of America ( BAC), which announced a 41% surge in fourth-quarter profits before the start of trading. Shares of the nation's third-largest bank were up 86 cents, or 1.9%, to $45.75. The Charlotte, N.C.-based bank, which reported growth in each of its main business lines, earned $3.85 billion, or 94 cents a share, in the quarter, compared with $2.73 billion, or 92 cents a share, a year ago. The optimism over fourth-quarter bank earnings also gave a big push to shares of Wachovia ( WB) and J.P. Morgan Chase ( JPM), both of which report earnings Wednesday morning. Wachovia's stock rose $1.64, or 3%, to $53.09 a share, while J.P. Morgan jumped 68 cents, or 1.8%, to $38.40. The Thomson Financial consensus estimate has Wachovia earning 98 cents a share in the quarter, a dime more than the year-ago period. The consensus estimate for J.P. Morgan is 68 cents a share, down from 89 cents. The lower estimate reflects additional shares issued in the Bank One buyout. Michael Stead, portfolio manager for River Aire Investment, a small financial services-oriented investment fund, says Wall Street is betting that Wachovia and J.P. Morgan will benefit from a revival in capital markets activity in the fourth quarter. But Stead says it's too soon for investors to jump headfirst into all bank stocks because 2005 will be a challenging year for some lenders. He remains concerned about the impact of the flattening yield curve on profit margins at regional banks that are invested heavily in interest rate sensitive mortgage-backed securities.