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Stocks Are Overvalued, So Say Treasury Yields

Published 03/25/2022, 08:08 AM
Updated 09/20/2023, 06:34 AM

This article was written exclusively for Investing.com

Yields have risen sharply across the Treasury curve and have even started showing signs of inversions. While rates in bonds are soaring, and even, perhaps, indicating a not so bright economic outlook, the S&P 500 has been rising. It is especially odd considering the dividend yield of the S&P 500 is moving lower and against the trend in the bond market. 

Historically, the difference between the S&P 500 dividend yield and the 10-year Treasury rate is wide. Over the past 10 years, the average spread between the 10-year Treasury rate and the S&P yield has been around 10 basis points (bps). That spread has widened to around 97 bps in recent days, at the very upper bound of that historical range. 

The standard deviation between the historical average has been around 60 bps, which places the spread in a range of -0.5 bps and 0.70 bps. The current spread is more than one standard deviation above that historical range, and typically when the spread widens by this much, it eventually leads to a contraction. 

Spread Widens

The big spread also tends to lead to markets that go through a period of consolidation or decline, such as witnessed from 2014 through 2016 and during much of 2018. It is yet another example of the market's similarities today with the market of those two periods. 

10-year Treasury Yield Vs. S&P Dividend Yield

It indicates that the current dividend yield of the S&P 500 is too low given where the 10-year Treasury rate is. The last time the dividend yield of the S&P 500 was this low, or in this region was back in the late 1990s, during the prior stock market bubble. 

S&P 12-month Dividend Yield

A Big Disconnect

Over the past 10-years, the dividend yield of the S&P 500 has averaged around 1.92%, within one standard deviation of that average between 1.68% and 2.17%. A return to just 1.68% would put an immense hurt on the value of the index.

Consensus estimates call for the S&P 500 to have a dividend of $67.83 per share over the next twelve-month period. Assuming the lower end of the range for a potential dividend yield on the S&P 500 would put the index at around 4,060. But to get back to the historical average of 1.92%, the index would slide to 3,570.

Of course, it isn't to say the market is due for a big dive, but one would think that with Treasury yields moving higher, the dividend yield of the S&P 500 should start to move higher with it over time. After all, the S&P yield versus the 10-year is now at a historically wide point, which typically hasn't lasted for very long. 

It is possible too that the 10-year Treasury is misaligned and that its value is what needs to fall back to the S&P 500 yield to help contract the spread. But what is clear is that currently, there is a mispricing in the market and something is off base. Given that the Fed is on a mission to tighten monetary policy, reduce the size of its balance sheet, and tighten financial conditions, the odds favor the S&P 500 being the one offsides. 

Latest comments

Great article, thank you. I had no idea about that deviation . I guess its snother example of “ you learn something new every day”, but only if a person reads and seeks to expand their knowledge can a person learn something new!
Good point. Another ***in the "bull market story". 1.) no more QE 2.) rising energy prices are not inflationary - "inflation is always an everywhere a monetary event". It is a price increase which acts like a tax.  3.) Stock market valuations are at historical extremes. Example: even after dropping 67% ARKK's holdings valuations still make no sense. 4.) The bubble has burst. 5.) interest rates are rising.  6.) War - nobody knows where that goes
Thank you for the article 👍
Outstanding article, will pay dividends IF you listen
*S&P misaligned perfectly for a gigantic or even gargantuan fall sooner than later
We know where you live
Should the ever increasing buybacks (on pace to surpass last year to another $1T+) be brought into play? Is this just the excess of cheap dollars being deployed? I'd rather take the check. Dollars should go to R&D, top talent and shareholders.
Breaking news: Kramer and Knight from investing.com officially accepted janitor posts at Tesla Austin
lay off the crack
Inflation and war phobic, no doomsday in sight. You need to get by on veggies
he should stay and you should find another article to read if you don't like it
Someone get rid of this guy
You like echo chambers?
A utterly nonsensical analysis. Due to heavy taxes on dividends, corporates have been shifting to buybacks to reward investors. The SP500 12 month Sep 21 buybacks were 742 billion - a rise of 30% year on year. The SP500 12 month dividend payout of Sep 21was 499 billion up just 2.3%.All this analysis shows is corporates now getting around the double taxation of dividends (on profits earned by company and then again on the profits distributed to investors).
Agree
What about the current average S&P 500 PE ratio being so high compared to the historical average? That tells me that the valuation is a bit off as well
PE has historically been a poor indicator, reason being is because high/low PE can stay elevated/suppressed for quite some time. the reason PE was so high the past 10 years or so was because there wasn't inflation so investors were will to pay more for earnings. we have yet to see if current high inflation will have an impact on how much investors are willing to pay for stocks. my guess is the multiple investors are willing to pay will start to decline now that we are in a tightening cycle
What about the current average S&P 500 PE ratio being so high compared to the historical average? That tells me that the valuation is a bit off as well
lol another day and ... WRONG! again haha this poor fellow.
The one good thing out of all this is he always keeps me on my cautionary toes"""
I vote for dismissing Kramer
Yields are overvalued, So say stocks
Long Term PE Ratio = you are wrong. Esp as we enter a QT stage, High Inflation, High Energy and no more stimulus stage. All historic evidence would point to a fall within 12-18 months as ZERO chance can the economy stay this hot
SP 500 pe is around 19 historical average is 16 so not that far off in a low rate enviromwnt which we will have even when fed raises
 The PE Ratio is actually 25 currently versus a 16 long-term average. Doesn't sound like a lot but the difference between 16 and 25 is a 40%+ overvaluation. Add in a LOT of profits made in 2020 and 2021 were on the back of massive QE and stimulus cheques and can see profits fall over the next few quarters from record highs once this stimulus and very accommodative environment ends and we enter a QT cycle (esp when throwing on top inflation/labor shortages/supply issues/ massive debt hangovers and Ukraine).
His writing always opposits the Market. So do the opposite for this writting but do same on other writer.
Agree
Trust him short the market
Stocks are very well priced right now. I think investing.com should dismiss Kramer for consistently operating as a biased recession short.
lol these guy and his biased opinions, if you would have listen to him you would have had big losses by now. DO NOT LISTEN TO BIASED ANALYSTS at either direction. this guy has a very bad track record.
The whole premise of trading is having an opinion or an assumption. Beyond that he is showing a market misprice which is exactly what the market does all the time, corrects mispricing.
one thing is having an objective opinion vs a biased one. he could say that nobody knows what the market will do, and that is the absolute truth. he has been calling a big crash since spy was 300 according to his analysis and look at where we are now. the problem is many novice traders trust guys like this thinking they know more. nobody knows where the market will be, his GUESS is as good as any other bullish analyst. I am agaist biased articles either way bullish or bearish.
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