Capital Markets: Observations & Insights
Stocks Are Cheap Relative to Bonds Valuation
• Historically, the “earnings yield” of equities (inverse of the P/E) has been just modestly above 10-year Treasury yields • Since the Global Financial Crisis, however, that spread has widened out and has yet to normalize, making equities attractive relative to bonds
S&P 500 EPS Yield
Treasury Bond Yield
16%
14%
12%
10%
8%
Spread of >350bps indicates stocks are attractive relative to bonds
6%
4%
2%
0%
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
2018
Source: FactSet, Federal Reserve, and S&P, as of 3/31/19.
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