Brokerage stocks are acting irrationally.

Despite an especially weak summer for investment-banking work, and research analysts lowering their third-quarter earnings estimates, shares in most Wall Street firms continue to climb.

Over the past month, shares of Goldman Sachs ( GS) have jumped more than 9%. Lehman Brothers ( LEH) shares are up more than 10.6%, Morgan Stanley shares are up more than 9.3%, and Merrill Lynch ( MER) is up over 11.4%. The Amex Securities Broker Dealer Index, an average measure of the performance of brokerage stocks, is up nearly 10%.

"The stock tends to move with the markets and interest rate changes, more than it moves with earnings fundamentals," says Dick Bove, a Punk Zeigel analyst, commenting in a recent research report on shares of Lehman. "Therefore, even though the earnings outlook may have deteriorated, the market may not care."

Bank stocks are often thought of as a safe investment, particularly when the Federal Reserve is keeping interest rates stable or paring them back. In theory, any pause by the Fed in raising interest rates should be good for banks, because it might lead to a widening of the gap between short- and long-term interest rates.

But some say that conventional wisdom may not play out this year. Some worry that after the much-anticipated pause, the next move by the Fed could be to start reducing rates -- an event that could be a harbinger of economic weakness.

However, that theory about the Fed and interest rates is debatable when it comes to investment banks, which generate a large part of their earnings from advising on corporate mergers and underwriting debt and equity deals. Deal activity in the third quarter has significantly slowed at investment banks, and although the summer months are typically lethargic in the markets, this quarter has been particularly quiet.

The lack of deals has prompted a handful of analysts to lower their earnings expectations. Bove recently lowered his earnings estimates for Morgan Stanley and Lehman Brothers, saying that the investment-banking activity has slowed and that trading activity is challenged.

"It appears that June was a choppy month, and both July and August had disappointing results," he said in a recent report. "We are also less sanguine about intermediate-term prospects."

Bove isn't the only analyst to cut estimates for the third quarter. Merrill Lynch brokerage analyst Guy Moszkowski recently lowered his third-quarter earnings estimate for Goldman Sachs, saying that merger-and-acquisition activity at the firm had declined more than expected in the quarter.

This summer, the IPO market has been worse than normal, and that can often create a domino effect in elbowing out investment-banking business. Recently, the IPO market has been in the spotlight for smacking down new issuances. An estimated $2.4 billion in equity deals were withdrawn or postponed last week, the biggest week this year, says Dealogic. So far in 2006, 44 IPOs have been pulled, vs. 37 for the same time last year, a 19% increase.

Other markets can start to drag as a result. For example, if companies can't raise equity, they will often start to use the debt market. Debt investors will become saturated with deals more quickly than normal and start to offer more expensive deals. The difficult conditions eventually creep down to the M&A business, meaning fewer mergers will get done.

Still investors don't seem to care, as evidenced by the latest run in brokerage shares. But that could change down the road if brokerage earnings look paltry compared with the first part of the year.

"In sum, not a great quarter. The major issue, however, is whether it matters," Bove said.

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