NEW YORK ( TheStreet) -- Investors growing more confident in the viability of banks, insurance companies and investment firms have pushed stock price multiples much higher this year, but in 2014, price appreciation will once again be driven by increases in analysts' earnings estimates, according to KBW.
"As financial stocks continue to rally, and with most financial stocks above tangible book value and significant earnings multiple expansion since 2011, the room for further expansion in multiples is becoming limited, in our view," wrote KBW analyst Frederick Cannon in a note to clients on Sunday.
Cannon noted that the "S&P 1500 Financials excluding the Real Estate Sector is up nearly 42%" this year, compared to a "32% gain for the overall market." KBW's data also shows that "the rally in financials tracked positive earnings estimate revisions reasonably closely most of the year. However, the rally in stocks during the fourth quarter was despite a weakening trend in earnings estimate revisions."
The outsized price-to-earnings multiple expansion for financial stocks this year and last shows just how beaten-down financial names were in the wake of the credit crisis and recovery. But when investors consider the continued forward price-to-earnings multiple expansion, even as consensus earnings estimates decline during the fourth quarter, things may seem a little hot.
Looking ahead, investors will see the usual catalyst for large-cap bank stocks in march, when most of the banks are expected to announce dividend increases and/or increases in plans to buy back shares, following the Federal Reserve's annual round of stress tests.
The Federal Open Market Committee's recent decision to begin tapering the Federal Reserve's monthly purchases of long-term bonds is pushing long-term rates higher. While this move will provide a bit of a boost for banks' net interest margins, the banks are looking for a parallel rise in interest rates, which can only come about when the Fed moves the target for the short-term federal funds rate above the current range of zero to 0.25%, where it has been stuck since late 2008.
But for insurers, the rise in long-term rates will provide plenty of fuel for 2014.