FORTUNE — The banks are back — at least when it comes to the market. For the first time since the financial crisis, shares of the nation’s largest banks look likely to handily outperform the rest of the market in 2012.
The S&P 500 Financials index, which tracks 81 companies and also includes insurers and such asset managers as Blackrock (BLK), is up 22% with a little over two weeks left in the year. That’s nearly double the return of the full S&P 500, which is up nearly 13% in 2012.
Shares of Bank of America (BAC), for instance, are up 90% this year to a recent $10.50, making it the best performing of the bunch. But all of the big banks have seen their shares pop this year. The stock of Citigroup (C), which recently pushed out CEO Vikram Pandit, is up 43% this year.
MORE: Wall Street experts: Where to invest in 2013
Investors seem to be cheering bank stocks at a time when the firms are still struggling. Indeed, the market gains, perhaps not coincidentally, have come at a time when the banks have been sending more and more of their staffs to the curb. Recently, Citi’s CEO Michael Corbat said his bank will cut 11,000 positions. Bank of America has cut about 16,000 workers this year.
What’s more, the types of events that used to send bank stocks tumbling have barely dented their shares this year. Remember the London Whale. The market doesn’t. Shares of JPMorgan Chase (JPM) are up 30% this year, despite the $6 billion trading loss. Bank of America, too, agreed to pay $2.4 billion to settle a suit that it mislead shareholders when it purchased Merrill Lynch at the height of the financial crisis.
Nonetheless, things do indeed appear to have improved for the banks in 2012. Lending increased, albeit slowly, for the first time since the financial crisis. The mortgage business was a bright spot for big bank profits this year. It had been the largest source of their pain during the financial crisis.
Capital ratios — a measure of bank health that compares how much money banks have on hand to cushion them against bad loans and other assets — for most banks have nearly doubled. In the run-up to the financial crisis, the average tangible capital ratio at the large banks was 4.5%, according to the International Monetary Fund. That means if just 4.5% of a bank’s loans went bad, it would have to raise more money or it would be out of business. These days those ratios for most of the large banks are more like 9%. Goldman Sachs’ (GS) ratio is now 13%.
MORE: More bank deals on the way
The question is whether bank investors have gotten ahead of themselves. Some have wondered, for instance, in another change from the financial crisis, if Goldman has too much capital. New regulations have restricted what the banks and can do. Goldman and others may have run out of ideas of where to put their money to produce new revenue. In announcing Citi’s job cuts, Corbat’s first major move since taking over the bank in mid-October, he said very little about how he would boost business. For all banks, analysts expect revenue in the fourth quarter to be down from last year.
KBW bank analyst David Konrad recently wrote in a report to clients, “After a strong run, it might be time for a pause.” He was writing about Bank of America, but he could have easily been writing about American banks in general.