Updated from 9:53 a.m. ET with afternoon market action and comment from Rafferty Capital Markets analyst Richard Bove.
NEW YORK ( TheStreet) -- The market continues to fear the regulatory and political onslaught will threaten profits for the largest U.S. banks for years to come.
At least that's what the stock valuations tell us.
The KBW Bank Index (I:BKX) was up 29% year-to-date through Thursday's close at 66.38, following a 30% return during 2012, underscoring an amazing recovery for the banking sector.Some market watchers believe bank stocks are now overheated. KBW analyst Christopher Mutascio in a note to clients on Wednesday wrote "The surge in large-cap bank stock prices and P/E multiples do not seem to be supported by reported results given tepid net interest income, revenue and pre-tax pre-provision earnings growth." The analyst sees the market looking far ahead and setting valuations on expected 2016 results, "assuming the Fed doesn't raise short-term rates until 2015." On the other hand, investors may be "assuming a permanent revaluation of the sector due to higher capital levels that might imply lower susceptibility to recessionnary pressures," according to Mutascio, who added "we think each thesis carries some risk at current valuations." According to the analyst, Since the day before the start of 1Q13 earnings season (close on April 11), the BKX Bank Index has surged 17% and the P/E multiple for our large cap bank universe has increased a similar 15% (10.0x to 11.5x)." Investors may want to take note that all "big six" U.S. banks trade at lower forward price-to-earnings multiples than KBW's average of 11.5, for large-cap names:
- Shares of JPMorgan Chase (JPM - Get Report) closed at $56.63 Wednesday and traded for 9.3 times the consensus 2014 earnings estimate of $6.09 a share, among analysts polled by Thomson Reuters.
- Citigroup (C - Get Report) closed at $52.19 Wednesday. The shares traded for 9.4 times the consensus 2014 EPS estimate of $5.58.
- Goldman Sachs (GS) closed at $165.04, with the shares trading for 10.5 times the consensus 2014 EPS estimate of$15.68.
- Bank of America's (BAC - Get Report) shares closed at $14.71 and traded for 10.7 times the consensus 2014 EPS estimate of $1.37.
- Morgan Stanley (MS - Get Report) closed at $27.72. The stock traded for 10.7 times the consensus 2014 EPS estimate of $2.58.
- Wells Fargo (WFC - Get Report) was the most expensive among the big six, with shares closing at $44.31 Wednesday, trading for 11.0 times the consensus 2014 EPS estimate of $4.01. Wells Fargo has consistently been the strongest earner among the big six since the credit crisis began. Even though it's the most expensive among these six names, the shares could still see quite a strong run over the next several years, assuming investors' trust in the big banks builds. The shares routinely traded for more than 20 times earnings before the credit crisis began in 2008.