Last year was fabulous for the securities industry. Pretax income reached an estimated $12 billion, besting 1996's record of $11.3 billion, according to the Securities Industry Assn.

But don't assume that 1998 will reach the same heady levels.

For one thing, the U.S. economy may not be as cooperative. True, interest rates are expected to stay low, which would help the stock market. The 30-year Treasury bond will end 1998 at 6.02%, up only slightly from about 5.90% at yearend 1997, estimates Standard & Poor's DRI. But a slowdown in corporate profits is expected, which could put a damper on the stock market. The growth in earnings per share of the Standard & Poor's 500-stock index is expected to fall from a 9.13% gain in 1997 to a 3.12% gain in 1998, estimates Standard & Poor's DRI.

It will also be tough for brokerage stocks to continue their breathless climb. In 1997 through mid-December, a group of 28 brokerage stock prices were up an average of 77%, says Financial Service Analytics, on top of a 45% gain in 1996. Merrill Lynch & Co. alone was up 79%. Yet former Wall Street darling E*Trade Group fell from $40 in September to $20 in mid-December.

WEAKNESSES. There were other signs of more fragile market conditions. Equity and debt underwriting and mergers and acquisitions volume all set records in 1997. But post-October, there have been weaknesses. The stock market has been very volatile, emerging market securities have been hammered, and technology stocks have melted down. The initial public offering market is "starting to see some deterioration in pricing," says Richard J. Peterson, analyst with Securities Data Co. The darkest cloud is the turmoil in Asia. While only about 10% of the big securities firms' earnings come from the Pacific, it was considered an important growth area.

Not everyone agrees that the party is ending. David S. Pottruck, the new co-chief executive of Charles Schwab & Co., says the San Francisco firm has no plans to slow its aggressive growth. It's scrambling to keep up with record increases in revenues, assets, online accounts, and payroll: Some 3,000 of its 11,000 employees were hired in 1997. Demand is so strong that Schwab gives employees cash bonuses and trips to Hawaii for referrals. "Those people who say next year can't be as good as last year will be left behind," says Pottruck.

Consolidation, 1997's biggest trend, is expected to continue in 1998. Banks are still on the prowl and more potential takeover candidates remain, from Lehman Brothers to PaineWebber to Legg Mason. The coming year will also be the big test for many 1997 acquisitions. With many employees' golden handcuffs coming off, banks may decide to let some high-priced talent walk. Those 1997 bonuses may have to last through 1998.

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