Despite its bravado, the Greek leadership capitulated on Monday to the country's creditors, agreeing to bailout conditions that are at least as stringent as those the Greek people rejected eight days ago (including an extraordinary degree of oversight.) European markets are reacting well today, and I expect this latest twist is contributing to the gains in U.S. stocks, too. The Dow Jones Industrial Average (DJINDICES:^DJI) and the broader S&P 500 (SNPINDEX:^GSPC) were up 0.95% and 0.81%, respectively, at 12:57 p.m. EDT. The technology-heavy Nasdaq Composite was up 1.22%.
Note that I referred to a "twist" rather than a conclusion, as we are still some ways from the latter. It remains to be seen whether the Greek government will be able to pass necessary reforms through its legislature (they have only three days to do so) or, indeed, whether all of its key eurozone "partners" will get the go-ahead from their national parliaments to begin formal negotiations with Greece. (Crucially, Germany remains a question mark.)
Yellen from the Hill
While that saga plays out, traders in the U.S. will be heavily focused on Federal Reserve chief Janet Yellen's semi-annual report to Congress, which begins on Wednesday. Yellen indicated in a speech last Friday that it would be "appropriate" for the Fed to implement the long-anticipated liftoff in its policy interest rate this year. Market junkies and traders will be looking for any and all additional scraps of information, but for long-term investors, I'd caution that the relevance of this topic is marginal (at best).
Speaking of interest rates, however, five of the six top commercial and investment banks will report earnings this week: JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) on Tuesday, Bank of America (NYSE:BAC) the following day, and Citigroup (NYSE:C) and Goldman Sachs (NYSE:GS) rounding things out on Thursday (Morgan Stanley reports next week).
Consensus forecasts have earnings per share for S&P 500 Financials shrinking 4% year on year, in line with the expected contraction in EPS for the entire index (and that of another cyclical sector, industrials).
In principle, a rising interest rate cycle ought to usher in a steeper yield curve, i.e., a larger spread between short- and long-term interest rates. That, in turn, produces better net interest margins for banks (the difference between the rate at which banks are able to borrow money and that at which they can lend it out).
Interestingly, however, even as the first interest rate rise in nearly a decade now looks imminent, next year's earnings forecasts do not appear to reflect much enthusiasm for the sector. Indeed, with estimated earnings of $25.44, implying 9.6% year-on-year growth, financials are in the middle of the pack of S&P 500 sectors when they are ranked on the latter measure (estimates for 2015 also imply "mid-pack" growth). As a result, financials are the second-to-cheapest cheapest sector in the S&P 500 on the basis of price-to-earnings, at just 12.9 times the 2016 EPS estimate (as of last Thursday's close).
Perhaps that is because investors, lulled into a torpor by a multi-year zero interest-rate policy, are adjusting slowly to the idea of a steeper yield curve: Five months prior to the start of the last rising rate cycle (June 2004), the spread between the two- and the 10-year Treasury bond yields was roughly 2.35% compared to just 1.50% today.
A pocket of (decent) value
Either way, I think the top universal and commercial banks (B of A, Citi, JPMorgan, and Wells Fargo) continue to offer decent, though not exceptional, value. In a stock market that is somewhat overvalued, that's a pretty good proposition when it comes to participants in a profitable oligopoly.