Bank of America posted lower earnings on Friday, following strong showings from its peers which have driven stock markets higher, and General Electric's profits also tumbled.
With results from Citibank pending, Bank of America said second-quarter net income fell 25 percent to $2.42 billion due to a surge in troubled loans as more customers fell behind on payments.
"Difficult challenges lie ahead from continued weakness in the global economy, rising unemployment and deteriorating credit quality that will affect our performance for the rest of the year and into 2010," Chief Executive Kenneth Lewis said.
GE, America's largest conglomerate, said profits fell by almost half as the slump that has gripped its finance and media businesses took hold of its heavy industrial units.
Stock markets have rallied this week as better-than-expected earnings from several big U.S. companies have raised hopes of better times ahead.
But many experts say an ongoing stream of evidence of recovery is needed to propel markets much higher. Broader economic data continues to be mixed.
Bank results have driven investor sentiment this week.
JPMorgan Chase & Co said on Thursday record investment banking fees helped drive a 36 percent rise in quarterly profit but that credit quality in consumer mortgages and credit cards was deteriorating faster than it expected.
That warning tallied with analysts' fears that banks' improving performance could be confined to the second quarter when equities soared.
"Earnings from U.S. banks have been upbeat, but there are concerns that the positive results could be limited to the second quarter," said Takahiko Murai, general manager of equities at Nozomi Securities.
"Some institutions appear to hold significant bad loans and third-quarter results may not be as encouraging."
Earlier in the week, Goldman Sachs Group Inc said quarterly earnings surged 33 percent, just nine months after the U.S. Treasury bailed out the nation's largest banks — many crippled with bad debts stemming from a U.S. housing market meltdown — with $125 billion of taxpayer money.
European shares rose for the fifth day running but U.S. stock futures extended losses on caution over how long the market's recent run-up would last, following the GE and Bank of America results.
The financial trouble is far from over.
CIT Group Inc is scrambling to secure financing after the collapse of rescue talks with the government left the 101-year-old U.S. lender to hundreds of thousands of small and medium-sized businesses on the brink of bankruptcy.
ECONOMIC PICTURE PATCHY
U.S. Treasury Secretary Timothy Geithner told French newspaper Le Monde he was more optimistic about the economic outlook than he was three months ago.
"I think that we are doing better than we could have imagined at the beginning of 2009," he said.
The euro zone recorded a trade surplus in May as imports contracted more than exports, data showed on Friday.
Year on year, exports plunged 24 percent but imports fell even more, 27 percent, underlining the weakness of both domestic and external demand amid the global economic downturn.
Nonetheless, Germany's economy ministry said gross domestic product may have bottomed out in the second quarter after a record contraction in the first three months of this year.
"There is much to suggest that overall economic activity may have stabilised in the second quarter of this year," the ministry said in its monthly report for July.
In Japan, members of the government's key economic panel said the Bank of Japan should work to stop prices falling further, as a deflationary spiral posed one of the biggest risks to recovery in the world's second-biggest economy.
But Friday's frontline economic evidence is again from the United States, with June building permits and housing starts figures due at 1230 GMT.
Following a dramatic collapse coupled with irresponsible lending practices, the housing market has been showing some signs of stabilisation, with sales rising and home price declines moderating in many regions of the country.
Investors fretting over the health of the global economy had received a fillip from China on Thursday, with surprisingly strong economic growth of 7.9 percent in the second quarter, fuelled by state spending and bank lending, reinforcing hopes it may lead the world out of recession.
U.S. and European data have been far more mixed.
"This is going to be a bumpy ride for the next six months for the economy. We are going to have volatility in the data because they are not all going to all turn at the same time," said Kurt Karl, chief U.S. economist at Swiss Re in New York.
