The U.S. brokerage industry continues to perform well, and the outlook for the coming year is rosy, says Standard & Poor’s Ratings Services. However, the agency cautions in a new report that risks are lurking.

S&P says that fourth-quarter 2003 results generally showed a continuation of positive trends in markets begun earlier in the year. Fixed-income underwriting and trading are strong, investment banking is improving, as is retail participation, and higher markets are boosting asset management businesses. As well, brokerage firms have increased hiring as a result. The only weak area is institutional trading, where margins remain under pressure.

The positive fundamental trends and the start of staffing up by firms has S&P expecting a good 2004 for the industry. “Solid earnings performances, however, should be viewed in the context of risks to the industry,” the rating agency cautions. “New legal issues continue to unfold, with the latest being fee and soft-dollar arrangements between brokers and mutual funds.”

S&P does not expect material declines in profitability as a result of these exposures. However, it notes, “Many other legal and regulatory issues continue to percolate, but with less media attention with the passage of time. Although these issues bear watching, Standard & Poor’s does not expect rating actions based on the current state of regulatory affairs for any broker. Additional risks include any potential weakness in either equity or fixed-income markets.

“As is always the case, there are downside scenarios that could derail the brokerage industry’s earnings recovery of the past year.”