Stock and Bond Valuations

Here's a historical look at stock vs. bond valuations. This simply compares the S&P 500 earnings yield (E/P or inverse of P/E) to the 10-year U.S. Treasury bond yield. Note that the S&P earnings yield (blue line) surpassed the 10-yr yield (brown line) in 2002 following the dot com bust and the continued multi-decade downtrend in bond yields. The black line is the earnings yield minus the 10-yr yield and highlights the apparent relative attractiveness of stocks over bonds. However, the earnings going forward are less certain. Plus, although the Fed has been pushing yields lower, the COVID-19 response has made the federal deficit soar. The U.S. government is expected to issue $2.99 Trillion of debt in just the second quarter. This is 5x as much as during the height of the global financial crisis. The lower panel shows the S&P 500 index and the Bloomberg Barclays US Agg total return index. Meant to be an FYI and material to marinate on.