10-Year U.S. Treasury Yield Surpasses S&P 500 Earnings Yield, Reaching a 25-Year High

TechFlow reports that on September 29, the yield on the 10-year U.S. Treasury bond surpassed 5%, exceeding the earnings yield of equities as measured by the inverse of the S&P 500 index's price-to-earnings ratio. The relative attractiveness of bonds over stocks has reached its highest level in 25 years, breaking nearly two decades of the post-financial crisis investment paradigm that favored equities over bonds. The rise in long-end interest rates has already caused investors who previously positioned themselves in long-term bonds (such as holders of the TLT ETF) to incur substantial losses.

Yale University economist Robert Shiller's cyclically adjusted price-to-earnings ratio (CAPE) model indicates that the S&P 500 index may only outperform bonds by an annualized margin of approximately 1% over the next decade. Although the model's predictive accuracy has somewhat declined in recent years due to policy interventions, the current value of bonds as an alternative stands at a historical high, the margin of error for corporate earnings expectations has narrowed considerably, and equity market prospects continue to face persistent valuation pressure.