Fourth-quarter 2004 earnings were generally good in the U.S. brokerage industry, and the current quarter is off to a good start, according to a report released today by Standard & Poor’s Ratings Services.

However, earnings growth in the first and second quarter will pale in comparison to last year, S&P says.

“While equity markets began a strong upward trend after the election, fixed-income markets have been relatively stable despite Fed tightening and the certainty of tightening yet to come,” said Standard & Poor’s credit analyst Tom Foley.

During the fourth quarter, corporate debt issuers took advantage of the continued benign rate environment, which was coupled with very tight credit spreads on an historical basis, S&P explains. “Fourth-quarter strength in equity markets faded in January, and given the level of credit spreads and the flattening yield curve, it is hard to imagine that brokers will benefit from a hospitable market environment, at least not in the near term,” it says. “This is not to suggest that the industry is facing the downside of the cycle; rather, earnings growth, especially compared to that of last year’s first and second quarter, will not be kind to the industry.”

However, there was still positive news for the brokerage industry, Standard & Poor’s says. It bumped up rating outlooks on Morgan Stanley and Lehman Brothers Holdings Inc. to positive from stable at the beginning of the fourth quarter. S&P says these improved outlooks are based on a longer term view of the earnings capacity and diversification of these entities rather than on the results of any one quarter.

There was also some greater clarity on the litigation front, it notes. “Merrill Lynch had a significant litigation win during the quarter, when the Second Circuit court upheld a lower court ruling that requires plaintiffs in research independence class-action suits to show a causative relationship between research and stock prices. This requirement could also have implications for other types of cases and is in general a positive for the entire industry,” it says.