Standard & Poor’s concedes that the U.S. brokerage industry has shown strong year over year earnings growth, but says that this performance must be viewed in light of the industry’s unusually weak performance in third-quarter 2002.

S&P says that the brokers’ performance in 2003 has been buttressed by an accommodative Federal Reserve Baord, tightening credit spreads, and strong issuance of mortgage backed securities. “These factors have combined to support strong results in fixed-income sales and trading and underwriting during the first half. The third quarter, however, was notable for a sharp rise in the long end of the yield curve,” it says. “Despite this, most firms did reasonably well, even firms such as Bear Stearns Cos. Inc. and Lehman Brothers Holdings Inc., which get a substantial amount of their revenue from fixed-income activities. In some cases, rising interest rates resulted in weak trading revenues, as shown in the results for Goldman Sachs Group Inc. and Credit Suisse First Boston.”

The ratings agency says that the rebound in equity markets and declining risk aversion are responsible for an increase in equity underwriting, M&A announcements, retail brokerage volumes, and increased assets under management in equity funds. “Equity trading revenues have been reasonably good at most firms despite historically low volatility.”

Looking ahead, S&P sees earnings improving for the fourth quarter. “Notwithstanding seasonal weakness, fourth-quarter 2003 results should improve for the industry as compared to those of the third quarter as long as interest rates do not move abruptly. “Fourth-quarter 2002 was a very weak quarter for the industry, so year-over-year comparisons should look good,” S&P says.

S&P adds that it has recently changed a number of outlooks on the brokerage firms in recognition of the inherent strengths of several firms that seemed to endure the downturn in comparatively good shape.

“While Legg Mason Inc. was upgraded, LaBranche & Co. Inc.’s rating was lowered and placed on CreditWatch with negative implications. Legal issues continue to plague the brokerage industry, with the latest threat being the investigations into mutual fund trading added to ongoing investigations of sales practices. Standard & Poor’s will continue to monitor credit risks associated with these issues as they evolve,” it concludes.