NEW YORK - Lehman Brothers Holdings Inc., the nation's fourth-largest investment bank, said Tuesday robust stock trading and buyout business pushed second-quarter profit up 27 percent, in what may be a harbinger for other brokerage earnings due this week.

Gains from stock trading amid a record run on Wall Street, as well as fees charged to companies for advice on takeover deals, helped drive Lehman's business during the quarter. This tempered a slump in its fixed-income business, particularly from the sagging performance of mortgage-back securities hurt by a squeeze in subprime loans.

This bodes well for other Wall Street firms _ Goldman Sachs Group Inc. and Bear Stearns Cos. post results on Thursday. They are expected to show that sharp international growth, trading and investment banking offset any weak areas _ a key as financial institutions face the possibility that interest rates will not fall this year.

"This is the beauty of having a diversified business mode," Lehman Chief Financial Officer Chris O'Meara said in an interview. "We're in a strong market environment with interest rates low, equity valuations staying strong, and activity levels continue in trading. We're optimistic."

Wall Street expected the Federal Reserve to lower interest rates this year before economic data began to suggest the economy is expanding. Lower rates spur corporate borrowing, which includes bond issuance and loans.

For the three months ended May 31, profit after paying preferred dividends rose to $1.26 billion, or $2.21 per share, from $986 million, or $1.69 per share, a year earlier.

Revenue rose 25 percent to $5.51 billion _ half of that coming from overseas.

Results topped Wall Street projections for earnings of $1.88 per share on revenue of $4.97 billion, according to analysts surveyed by Thomson Financial.

Chairman and Chief Executive Richard Fuld, who has led Lehman since it was spun off from American Express in 1994, has transformed the company into one of Wall Street's biggest investment banks. While Lehman's bond business has traditionally been its biggest revenue stream, Fuld has steered the bank into more profitable businesses globally, such as advising on mergers and acquisitions.

Diversifying the firm has allowed Lehman to remain profitable even as some of its key businesses lag. For example, this year the company has been able to compensate for weakness in its mortgage banking business related to subprime loans.

"Lehman kicked off the investment bank reporting season with exceptional results driven across almost all businesses with the exception of fixed income trading," said Goldman Sachs analyst William Tanona. "We expect the other brokers to rally alongside these results."

Equity trading drove Lehman's capital markets business to $3.6 billion from $3.1 billion year-over-year, a gain of 17 percent. However, the fixed income segment of that business _ which includes bonds, derivatives and credit products _ fell 14 percent to $1.9 billion from $2.2 billion a year-ago because of "continued weakness in the U.S. residential mortgage business."

There has been continued concerns since the start of the year about how major Wall Street firms would deflect losses in their mortgage-backed securities business caused by the slump in the housing industry. Lehman is the biggest U.S. underwriter and purchaser of mortgage loans, which the company then packages into securities.

Top executives at the firm have said recently that its exposure to mortgage loans represents less than 3 percent of total revenue during the past 18 months. Lehman has spent most of this year trimming that exposure after anticipating weakness in the industry at the end of last year.

"We continue to believe the subprime challenges are, and will continue to be, contained," O'Meara said. "Although we believe the subprime business faces headwinds in the near-term, we are seeing positive signs."

Lehman's investment banking unit posted revenue of $1.2 billion, up 55 percent from $741 million a year earlier. The flurry of takeover deals during the quarter caused many companies to seek financing, driving Lehman's debt origination up 87 percent to $530 million and equity origination up 60 percent to $333 million.

During the quarter, Lehman advised Tishman Speyer in its takeover of real estate investment trust Archstone-Smith Trust, a $22.2 billion deal including debt. It also advised CVS Corp. on its $21 billion acquisition of Caremark Rx Inc., and Altria Group Inc.'s spinoff of Kraft Foods.

O'Meara said Lehman remains well positioned for continued strength in its M&A business. This quarter it is advising ABN Amro on a possible sale, with bidders that include U.K. bank Barclays PLC and a group led by Royal Bank of Scotland.

Shares of the New York-based investment bank rose $1.57, or 2.1 percent, to $77.25.
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