Greece gave U.S. investors a gift. Stocks stormed to new highs after the debt-laden country and its euro-zone creditors reached an agreement late Friday on a four-month extension of its bailout package. Trading activity was moderate.

Action in major indexes ebbed and flowed all week with continuing negotiations, which were played out in the headlines. Markets were headed for a loss until rumors of an accord began to swirl Friday and after better European growth data released earlier the same day.

Market observers said that to some extent a rise in the U.S. 10-year Treasury yields, to 2.14% from 1.67% a few weeks ago, plus relatively stable oil prices, went some way to easing fears in the equity markets of deflation, for now.

The verbal warfare between Greece and Germany weighed on the market. The deal is just an extension, notes Milton Ezrati, market strategist for Lord Abbett, but “the sense right now is that Europe is going to pull it off,” and keep Greece in the euro zone.

Last week, the Dow Jones Industrial Average picked up 121 points or 0.7% to 18,140.44, a new high. The Standard & Poor’s 500 index did the same, closing at 2110.30 up 13. The Nasdaq Composite gained 62, or 1.3%, to 4955.97.

Friday, Markit, a financial information services firm, said its February Composite Flash Purchasing Managers’ Index for the euro zone rose to 53.5 from 52.6 last month, its highest level in seven months and topping forecasts. Business activity in services led. Overall, it’s not blazing growth, but investors took solace that it’s not contracting.

With Friday’s data, U.S. investors are more upbeat on Europe’s growth prospects, says RDM Financial Group’s chief market strategist, Michael Sheldon. German business sentiment improved, and even French data were better. “Europe is showing a pulse, and investors are warming to the fact that growth in Europe is starting to improve,” he says.

Investors might not have noticed that European stock markets have sharply outperformed the U.S. since the mini-correction last October in local currency terms, almost doubling up the S&P 500 index’s 13% rise. Over the next few years, Sheldon thinks U.S. equities, which have had a better run in recent years, will continue that underperformance. The European market is trading at a lower valuation, with a price/earnings ratio of 16.2 times versus 17.7 for the U.S., and lower operating margins, which have room to expand. Moreover, for this year at least, earnings estimates for S&P 500 companies are coming down, he adds.

This week investors will focus on Federal Reserve Chair Janet Yellen’s testimony in Congress on Tuesday and Wednesday. The Greek drama isn’t over, just postpone.

(Source: Barrons Online)