Yields on bonds have risen. This should in theory make equities less attractive on relative valuation terms.
However, the rise in the stock market has hardly been derailed as the yield on the 10-year treasury TMUBMUSD10Y,
reached 1.20% on Monday, extending the advance by almost a quarter of a point this year. US futures contracts ES00,
showed a positive start Monday, and European equities rose. The S&P 500 SPX,
climbed almost 5% last week when it reached its seventh record high of the new year.
Société Générale strategists led by Roland Kaloyan examined shares in the light of the ten-year treasury at a peak of 11 months. They looked at earnings-returns – in general, the price-to-earnings turned upside down – and compared to the returns of bonds.
As the chart shows, the gap between earnings and bond yields is not as small as at the end of 2018, when equities swung lower. The current spread suggests that equities could absorb treasury returns of more than 1.5%, the strategists said. Assuming earnings continue to move in line with analysts’ expectations, US and European stock markets could absorb another 135 basis points of weakening by the end of the year, strategists said.
Analysts expect S&P 500 earnings to grow by 24% this year and 16% next year, and for Stoxx Europe 600 SXXP,
companies’ earnings to grow by 41% this year and by 16% next year. ‘We remain constructive in the stock market, but American and / or European companies do not make that profit [earnings per share] ‘growth expectations are probably today a greater risk for the (respective) stock indices than rising bond yields,’ say the strategists.