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The big six U.S. banks, including Goldman Sachs and Bank of America, have added $100-billion (U.S.) of market value since mid-December, a 23-per-cent jump, despite meagre fourth-quarter earnings.

The latest bull run in U.S. bank stocks may prove fickle. The big six, including Goldman Sachs and Bank of America, have added $100-billion (U.S.) of market value since mid-December, a 23 per cent jump, despite meagre fourth-quarter earnings. Receding fears over Europe have helped better align bank valuations with balance sheet and income realities. But no further rally is warranted with more ugly surprises likely.

The latest surge in bank shares largely reverses the sharp declines suffered after MF Global's bankruptcy at the end of October. That brought the dangers of opaque and off-balance-sheet exposures to the fore once again, at least for a few weeks.

Investors have since shrugged off those fears and turned their attention to earnings. But those don't look pretty. All four of the top U.S. commercial banks by assets – BofA, Citi , JPMorgan and Wells Fargo – reported a decline in core earnings last year, even after allowing for any asset sales. And Goldman Sachs and Morgan Stanley are, along with BofA and Citi, floundering with returns on equity in the mid-single digits.

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That's not exactly the stuff of a market bounce. But consider where it has left valuations. Wells had the highest return on equity last year, at 12 per cent, which may just be enough to cover its cost of capital. Assuming results don't worsen, trading around 20 per cent above book value doesn't look off base.

The same goes for BofA. Even after its 40 per cent share rally in recent weeks, it only trades at a third of book value, or assets minus liabilities, right in line for a bank beset by mortgage problems that will struggle to eke out much more than 5 per cent equity returns for a while. Even Goldman and Morgan Stanley don't seem overpriced at 80 and 60 per cent of net asset value, respectively, considering their mid-single-digit equity returns. And they usually prosper first when business picks up.

The trouble is, shareholders have a penchant for overreacting to both good news and bad. With nothing too solid underpinning the latest stock advances, any more jitters about U.S. or European economies – a distinct possibility given the fragile conditions – could drive bank stocks right back down again.

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