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The earnings yield for the S&P 500 is at its highest level since 1996. The fact that the S&P 500’s earnings yield is higher than the 10-year Treasury yield suggests that either stocks are undervalued or longer-term bonds are overvalued. We think it is the latter rather than the former and that the valuation gap in the chart below will likely be closed primarily by rising bond yields.

[click to enlarge]

Source: Stock Earnings Yields vs. Bond Yields 1/85-7/06