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

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]

Comments

[Barry Gitarts:]

Cant you also play this by spread shorting bonds & buying stocks, untill the spread narrows?

2006 Aug 17 09:51 AM

[Oliver Schw...:]

Hi Barry,

unfortunatelly, you can not set up a spread trade, since the yield of the S&P depends on two factors, the price of the S&P and the earnings of the S&P companies. The spread could narrow due to falling earnings witout a move in the price of the index.

Oliver

2006 Aug 17 03:28 PM