The yield on the 10-year U.S. Treasury has risen above 5% and moved past the S&P 500’s earnings yield, measured as the inverse of the index’s price-to-earnings ratio, putting bonds at their strongest relative appeal versus stocks in about 25 years. On a simple yield comparison, that means investors can now earn more from holding U.S. government debt than from the current earnings yield implied by equities.
Yale economist Robert Shiller’s cyclically adjusted excess CAPE yield model suggests that, given current equity valuations and Treasury yields, the S&P 500 may outperform bonds by only about 1% per year over the next decade. The report also notes that the model’s forecasting accuracy has weakened in recent years, with actual stock market performance coming in well above earlier projections.
Higher yields partly reflect continued resilience in the U.S. economy, but they also raise the bar for stock valuations and corporate earnings expectations. Investors who previously bet on long-dated Treasuries have already taken losses as bond prices fell, yet yields above 5% are also prompting a fresh reassessment of bonds’ portfolio value.
On Sept. 29, the yield on the 10-year U.S. Treasury rose above 5% and exceeded the S&P 500’s earnings yield, calculated as the inverse of the index’s price-to-earnings ratio, according to BlockBeats. That has lifted bonds’ relative appeal versus stocks to roughly its highest level in about 25 years.
On a yield-only basis, investors holding U.S. Treasuries can now receive a return above the current earnings yield implied by equities.
Yale economist Robert Shiller’s cyclically adjusted excess CAPE yield model shows that, at current stock valuations and Treasury yield levels, the S&P 500 may outperform bonds by only about 1% per year over the next 10 years. The report added that the model’s predictive accuracy has declined in recent years, while actual stock market performance has come in materially above its earlier projections.
Part of the rise in yields reflects resilience in the U.S. economy, but it also puts greater pressure on equity valuations and corporate earnings expectations. Investors who had previously bet on long-term Treasuries have already absorbed losses as bond prices fell. At the same time, a 10-year Treasury yield above 5% is leading the market to reassess the allocation value of bonds.
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