First-quarter earnings for the U.S. brokerage industry were generally quite strong, Standard & Poor’s says in a new report released today.

Fixed-income, both trading and underwriting led the way at a number of firms, as did hedge fund activity. “Fixed-income trading was a strong contributor despite the threat of Fed tightening,” says Standard & Poor’s credit analyst Tom Foley. “Credit spreads tightened to all-time lows in January and did not widen until March, which was after quarter-end for several large firms.”

“Firms benefited from strong fixed-income underwriting as corporations rushed to market before interest rates rose and there was strong investor demand,” it observed. Also, “Completed mergers and acquisitions declined for the industry sequentially, but announced deals rose sharply.”

Asset management operations at major brokers had relatively flat performance compared to both fourth-quarter 2004 and year over year, S&P noted. Net flows of client funds in asset management were weak.

But, brokers reported continued strong lending activity with their hedge fund clients in the first quarter. “Hedge fund leverage may decline in the second quarter, however, due to weakness in the high-yield market and related margin calls,” it suggested.

Additionally, Standard & Poor’s said it has seen some negative news on the economy and the markets. “Although equity prices have declined so far this year, volatility has recently spiked. This may not be enough to turn around lackluster earnings from cash equities trading, but it should help in equity derivatives,” S&P suggests.

“Given that earnings growth may be hard to come by, we believe that brokers will come under increasing pressure from their equity investors to improve returns, and we expect increasing leverage and/or risk as a response, Foley adds. “Our outlook for the industry is stable and considers a lot of moving parts.”