With the war over and the threat of a regulatory silver bullet seemingly passed, investors have been scooping up brokerages shares in the hope the beaten-down sector is poised for a rebound.

The enthusiasm has gone too far, according to Prudential Securities. Prudential's David Trone and Matthew Fischer Friday lowered their rating on the sector to market perform from market outperform following its 14% year-to-date rally and a nearly 30% run-up since March 12. Both gains are about twice that of the S&P 500 during the same period.

"While we too are cautiously optimistic, the banking pipelines are still not showing improvement, even though the war in Iraq gets ever-smaller in the rear view mirror with each passing week," the analysts wrote. "Thus, we believe the group should generally remain range-bound until more clarity emerges."

Prudential currently rates Goldman Sachs ( GS) a buy, Morgan Stanley ( MWD) a hold, Lehman Brothers ( LEH) a hold, Merrill ( MER) a hold and Bear Stearns ( BSC) a hold.

Trone and Fischer said the sector's run-up is based on overly optimistic asssumptions. "The market appears to be anticipating revenue acceleration, despite the absence of tangible evidence, while, at the same time, slowly becoming more and more appeased that the regulatory issues are dissipating and the threat of private litigation may not be so bad.

"This concerns us," they wrote.

Indeed, a disgruntled investor Thursday filed a suit in Denver seeking class-action status against the 10 brokerages that agreed to a $1.4 billion settlement last week with the SEC and New York Attorney General Eliot Spitzer.

The lawsuit seeks undetermined damages, saying the global settlement separating research departments from investment banking does not cover losses investors incurred, Reuters reported.