There Is No Alternative

On July 15, 2020, I wrote about a relative argument for higher equity prices based on the earnings yield of the S&P 500 being at its highest factor or multiple (7 times) over the government 10 year bond yield since WW2.

https://lnkd.in/gMCbFC4

I’m trying to highlight that investors are being paid well to take risk and hold equities rather government bonds.

Today, the S&P 500’s forward P/E is 21.8, which puts it on an earnings yield of 4.6%. The 10 year bond yield has risen to 0.82%, so that spread is now 5.6 times.

But the equity market remains fertile (relatively) when I compare the landscape to early 2011 when the P/E was 12. The earnings yield (EY) of 8.3% was only 2.5 times more than 3.3% risk free rate.

From there, the S&P 500 rallied 40% from 1,280 to a January 2014 level of 1,800.

At that point the earnings yield of 7% was still 2.5 times more than 2.8% bond yield (P/E was 14.3) and the S&P rallied a further 55% up to 2,800 points in January 2018.

If we exclude the six FAANMG’s stocks (whom count for 25% of the index market cap), the S&P 500’s P/E ratio is 19.

Hmmm, that 5.2% earnings yield is 6.3 times more that the 0.82% bond yield.

October 26, 2020
by Rob Zdravevski
rob@karriasset.com.au

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: