What to watch: Stocks still better value than bonds
Traders on the floor of the New York Stock Exchange.(Photo: Richard Drew, AP)
NEW YORK -- U.S. stocks, which hit another record high Tuesday, aren't as cheap as they were when this bull market began in March 2009. But by one valuation measure, they're still more attractively priced than the 10-year U.S. Treasury note, a fixed-income investment that investors flocked to during and after the 2008 financial crisis and Great Recession.
When valuing stocks on a price-to-earnings basis, the Standard & Poor's 500-stock index is now trading at nearly 16 times its earnings over the past four quarters, roughly in line or a bit higher than the long-term average P-E ratio of 15.
But another metric, the so-called "earnings yield" on the S&P 500, makes stocks look like a better value relative to bonds, according to an analysis by Sam Stovall, chief equity strategist at S&P Capital IQ. The current earnings per share (EPS) yield of the S&P 500 is 5.4%, which is nearly three times as high as the current 1.95% yield on the 10-year Treasury note, the widest gap since 1955. Since World War II, the EPS yield averaged 1.6 times that of the 10-year U.S. government bond.
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"Common wisdom holds that if stocks are yielding a lot in EPS relative to bonds, stocks are more attractive than bonds," writes Stovall.
STORY: Is stocks' recent run start of second leg of bull[2]
History says that's bullish for stock prices.
In the prior occurrences when the earnings yield on stocks was more than two times the yield on the 10-year note, the S&P 500 rose nearly 12% in the coming 12 months, Stovall adds.
References
- ^ https://portfoliotracker.usatoday.com/?uref=whattowatch/ (portfoliotracker.usatoday.com)
- ^ http://www.usatoday.com/story/money/markets/2013/05/13/is-stock-market-breakout-sign-of-new-upleg/2142561/ (www.usatoday.com)