Merrill Lynch threw cold water on the financial sector Tuesday by downgrading Bear Stears, Citigroup and Lehman, citing their exposure to problems in the credit markets.
The three were downgraded to "neutral" from "buy," which helped pushed financial stocks lower.
Merrill analyst Guy Moskowitz wrote in a report to clients that most " '08 forecasts appear unrealistic for most."
The report said Lehman and Bear are the most "debt exposed", adding that both have "greater dependence on debt markets and the consequent need to reduce forecasts for the remainder of this year and for 2008."
Merrill cut its fiscal 2008 earnings outlook on Lehman by 22% to $6.80 a share, Bear Stears by 16% to $12.07 a share (after early Aug. cut of 18%).
But the Merrill also noted distinctions between Lehman and Bear Stearns.
"Lehman is far more globally diversified, has had a much more dynamic equities business over the past few years, and is less dependent on the troubled US mortgage sector than BSC. It also does not face the reputational issues BSC has resulting from the BSAM hedge fund problem," said the report.
Merrill cut Citigroup's 2008 earnings estimate by 5% to $4.91 as share and said its "securitization related and leveraged finance obligations" were greater than peers like JP Morgan.
Merrill continued to rate JP Morgan a Buy, but cut its price target to $56 from $60.
The report was positive on Goldman Sachs and Morgan Stanley.
"We think that, given their highly diverse business mixes and their significant geographical diversity of earnings, Goldman and Morgan Stanley are best positioned for the current environment – with the perhaps obvious caveat that it’s not a great environment for anyone in this business."