Led by strong institutional securities business, the U.S. brokerage industry posted improved earnings in the second quarter, Standard & Poor’s says in a report today.

The institutional business was pushed by another strong quarter in fixed-income sales and trading. “In many cases, fixed-income operations were responsible for most of the firm’s earnings in the second quarter, as was the case in the first quarter,” S&P says. “Declining interest rates for most of the quarter, a spate of corporate issuance, and high MBS volume supported strong fixed-income results.”

S&P also notes that the quarter showed signs of improvement in retail brokerage revenues and investment banking. “Although investment banking continues to be a pocket of weakness, revenues at several firms turned up in the second quarter, and deal backlogs have risen,” it says. “The long gestation period for M&A deals means that although announcements have risen, higher revenues may not materialize for two to three quarters.”

In asset management, equity assets are higher due to stronger markets and investors transferring out of money markets and into stocks. “This has helped revenues and the trend should continue, but perhaps at a moderate pace,” S&P says.

“Retail brokers generally reported improved revenues. Although profitability at the largest firms has risen, leverage has also ticked up as securities inventories are higher. In addition, trading risk increased at several firms. Modestly higher leverage is consistent with improving conditions in investment markets, even though there is evidence that stock market gains may not be sustainable and bond issuance and trading may be hampered by a rise in long-term interest rates.”

The firm says that cost cutting continued in the second quarter, both in compensation and non-compensation expenses. However, the industry is expecting headcount to stabilize.

S&P cautions that it is difficult to give firm projections of a continuation of the first half’s relatively strong results, “as the industry downturn of the past three years has been accompanied by intermittent improvements in financial markets that turned out to be unsustainable.”