'Some twisted logic about valuation multiples’: Stock-market investors appear complacent as rates rise, warns Morgan Stanley

The stock market has been complacent in the face of rising real yields and expectations for a higher terminal value for the federal-funds rate, moves seen in the bond market following hotter than-anticipated inflation in August, warns Morgan Stanley’s wealth-management division.

Yields in the U.S. Treasury market have continued climbing since the Labor Department on Sept. 13 released data from the consumer-price-index showing inflation was stronger than expected in August. Rates have been on the rise as investors anticipate the Federal Reserve will at the conclusion of its policy meeting on Wednesday announce another large rate hike to combat soaring inflation.

“Even though higher real rates due to policy tightening should mean lower valuations immediately and lower earnings eventually, the forward price/earnings ratio based on consensus estimates is 17.4,” wrote Shalett. “That’s exactly what it was in May when the 10- year real rate was negative.”“The real 10-year Treasury yield, at 1%, approaches a four-year high,” said Shalett. “Consider that back in June, when the real rate was at this level, the S&P 500 Index was at 3,667, 5.

“With forecasts for the terminal fed-funds rate now piercing 4%, investors are wondering whether the 10-year U.S. Treasury yield will break out of its cycle range and trade higher, or remain anchored and thus risk a yield-curve inversion,” according to Shalett’s note.

Treasury at 3.5, CPI at 6 or 7 and the real yield is +1? That's some math. Wall Street math. That bird won't fly.

Lambo?

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