There is an alternative

For years, bonds offered little competition to equities. That has changed.

As John Authers points out, the spread between the S&P 500 earnings yield and the 10-year Treasury yield is now close to its most negative level in almost 25 years. In simple terms, investors are once again being paid meaningfully to own bonds.

After the brutal repricing of long-duration bonds since 2021, yields above 5% have restored fixed income as a credible alternative to equities. At the same time, the valuation cushion that ultra-low rates provided to stocks has disappeared.

This does not mean equities have to fall tomorrow. The US economy remains resilient and earnings expectations are strong. But the hurdle rate has changed. When investors can earn around 5.25% in government bonds, equity valuations and earnings assumptions deserve much closer scrutiny.

As John Authers puts it, bonds are once again a valid alternative in a way they have not been for a generation.