Still-lofty P/E ratio: At Tuesday’s close, the S&P price-earnings ratio stood above 25x, well above the 17x that has historically proved to be sustainable. While the ultra-low Treasury yields that have prevailed since February argue for lower discount rates, considering that equities offer no promise of capital return, investors are prone to get bouts of doubt every now and then whether an earnings yield of 4% is enough compensation for underwriting such risk.
Earnings yield versus Treasuries: The gap between the earnings yield on the S&P and 10-year Treasury yields now measures about 333 basis points. Whether that margin represents a sufficient ex-ante equity risk premium is debatable. With the Treasury market still very much under its self-imposed curve-control mode, the gap may come under closer scrutiny -- even if not immediately -- when yields start climbing. #stocktalk
Earnings yield versus Treasuries: The gap between the earnings yield on the S&P and 10-year Treasury yields now measures about 333 basis points. Whether that margin represents a sufficient ex-ante equity risk premium is debatable. With the Treasury market still very much under its self-imposed curve-control mode, the gap may come under closer scrutiny -- even if not immediately -- when yields start climbing. #stocktalk