Capital Markets: Observations & Insights

The Great Rotation Valuation

• Moving from monetary stimulus and quantitative easing to fiscal stimulus and increased deficits should drive a Great Rotation from bonds to stocks • The magnitude of the rotation will be fueled by the valuation disparity between equities and bonds, which are expensive by comparison ‒ The earnings yield for equities is more than 300 bps greater than 10-year Treasury notes vs. a 60 bps median over the past half-century

Equity vs. Bond “Yields”

S&P 500 EPS Yield

Treasury Bond Yield

10 12 14 16

Stocks are attractively valued relative to bonds

0 2 4 6 8

>300 bps

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Source: FactSet, Federal Reserve, and S&P, as of 09/30/17.

Page 25