Bond yields have been increasing. This, in theory, should make stocks less attractive in terms of relative valuation.
However, the stock market recovery was hardly hampered as the 10-year Treasury yield TMUBMUSD10Y,
reached 1.20% on Monday, extending the advance by almost a quarter point this year. US stock futures ES00,
pointed to an optimistic start on Monday, and European stocks soared. The S&P 500 SPX,
rose almost 5% last week as it recorded its seventh record high in the new year.
Société Générale strategists led by Roland Kaloyan examined stocks in the face of the 10-year Treasury at an 11-month high. They analyzed earnings from earnings – basically, the forward price-earnings ratio turned upside down – and compared to earnings from bonds.
As the graph shows, the difference between earnings and bond yields is not as narrow as it was in late 2018, when stocks fell. The current spread suggests that the shares may absorb Treasury yields above 1.5%, the strategists said. And assuming profits continue to move in line with analysts’ expectations, the US and European stock markets could absorb another 135 basis points of tightness by the end of the year, the strategists said.
Analysts expect S&P 500 earnings to grow 24% this year and 16% next year, and for Stoxx Europe 600 SXXP,
Company revenue is expected to grow 41% this year and 16% next year. “We remain constructive in the stock markets, but American and / or European companies are not delivering these EPS [earnings per share] growth expectations are probably a greater risk today for (respective) stock indices than the increase in bond yields, ”said the strategists.