further fan those fears. But such thinking is folly. Interest rates don’t rule stocks. Here is why.
Hence, spreads between stock and bond yields hold irregular predictive power. Take the bull market of the early-2000s: In the United States, the average gap between 10-year Treasuries and the S&P 500′s earnings yield using projected earnings was 2.23 percentage points through its entire stretch – near today’s much-feared 1.89-percentage-point spread. U.S. stocks didn’t mind. They rose 121 per cent in U.S. dollars.
How can stocks soar when “safer” bonds yield similarly, or more? Unlike bonds held to maturity, stock returns aren’t capped by coupon rates. They benefit from economic growth and innovation – with no ceiling. They also pay dividends. If management foresees earnings growth, they can borrow, buy back shares and retire them – soaking up supply while increasing earnings per share and juicing returns. That is happening now, largely unseen. Bonds can’t do any of that.