10-year Treasury yields outperformed S&P 500 earnings yields at a level rarely seen in 25 years

PANews reported on September 29 that the yield difference between bonds and stocks has reversed to the most favorable level for bonds in 25 years. This structural change is forcing investors to re-examine the logic of asset allocation. The yield on the 10-year U.S. Treasury note topped 5%, making bonds more attractive than stocks to their highest level in about 25 years. Stock earnings yields, measured by the inverse of the S&P 500's price-to-earnings ratio, are currently lower than the 10-year U.S. Treasury bond yield, which means bonds have significantly suppressed stocks in terms of income. This pattern poses potential downward pressure on the stock market. Yale economist Robert Shiller's cyclically adjusted excess CAPE yield model shows that the S&P 500 could outperform bonds by only about 1% per year over the next decade. Investors' room for error in corporate earnings expectations has narrowed significantly.