As first-quarter earnings, the stress tests, the equity sales, and the other recent concerns of the banking industry grow smaller in the market's rearview mirror, it turns out that Wall Street analysts are starting to take a shine to the battered sector. On May 18, the S&P Investment Banking & Brokerage index was up nearly 4%, and the S&P Other Diversified Financial Services index gained 5% after analysts raised their ratings or price targets on various industry players.

Another long-suffering group, homebuilders, also gained on May 18, with the S&P industry index rising 6% on a better-than-expected report from Lennar (LEN) and a surprising jump in the National Association of Home Builders' survey index for May.

BusinessWeek staff compiled comments on these and other topics from Wall Street analysts and strategists on May 18:

Richard Bove, Rochdale Securities

The banking industry has excessive capital, excessive liquidity, and excessive reserves. It is returning to a more traditional method of operation where these metrics are critical to the growth of earnings. The economy may recover at the end of this year and into 2010. If so, a combination of these factors suggests explosive earnings growth and unusually strong stock price performance.

In the period from 1980 to 1991, the pretax earnings of the banking industry appeared to be stuck in a range of $19 billion to $22 billion per year, despite some wide gyrations in 1987 and 1988. However, in this same time frame the pretax, pre-provision earnings of the industry were growing relatively rapidly. These grew from $24 billion in 1980 to $57 billion in 1991. The earnings power of the industry was growing rapidly throughout this period because the banks were growing their capital, liquidity, and reserves while their earnings were being stressed by the increase in loan losses in the period. The increase in loan losses was masking the growth in earnings power.

The current environment is a bit more complex to assess due to the introduction of mark-to-market accounting. Despite this, it appears the industry is replicating the 1980-to-1991 phenomenon. The time frame is shorter due to the government's aggressive intervention, forcing faster writedowns of securities and loan problems. Unless one is convinced that the economy cannot withstand the recessionary pressures now in evidence, the numbers are clear. Explosive earnings and stock growth are ahead for banking.

Jan Hatzius, Goldman Sachs

Despite the renewed jitters in the equity market, the financial crisis continues to recede into the background.