Capital Markets: Observations and Insights Autumn 2019

An Easy Choice? ​ Lending vs. Owning

LENDING vs. OWNING

• Investors are paying a big premium for the safety of Treasuries relative to equities but how risky are stock fundamentals over the long term? ‒ Over 10-year periods in the past half century, S&P 500 EPS has grown an average of nearly 7% annually, or almost 90%, while a Treasury bond coupon does not grow

Stock P/E Is Attractive Relative to Treasuries…

…And Equity EPS Can Grow!

S&P 500 P/E 10-Yr Treasury "P/E"

S&P 500 EPS Treasury Bond Coupon

70x

-2% 0% 2% 4% 6% 8% 10% 12%

60x

50x

40x

30x

20x

10x

0x

Rolling 10-Yr Annual Growth

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

2010

2014

2018

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

2010

2014

2018

Source: FactSet, Robert Shiller, Alger. Notes: periods used were annual. Treasury “P/E” is inverse of yield to maturity. Earnings per share (EPS) is the portion of a company's earnings or profit allocated to each share of common stock.

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