Stocks are nearing their highest level of overvaluation compared to corporate credit and Treasury bonds in about two decades. The earnings yield on S&P 500 shares, which is the inverse of the price-earnings ratio, has reached its lowest point relative to Treasury yields since 2002. This indicates that equities are currently at their most expensive point compared to fixed income in decades. According to data, the S&P 500's earnings yield stands at 3.
7%, close to its lowest level compared to the 5.6% yield of BBB-rated dollar corporate bonds since 2008. Typically, the equity profit yield surpasses the BBB figure due to the higher risk associated with stocks. However, when the gap between the two figures turns negative, as it is currently, it often foreshadows trouble for the stock market. Experts suggest that this negative gap, observed only during economic bubbles or periods of soaring credit risk, presents a cause for concern. Although a market correction isn't imminent, the sustained negative spread between the S&P's profit yield and BBBs for about two years raises questions about the sustainability of the post-US election rally in the stock market. Morgan Stanley strategists warn that rising yields and a strong dollar could negatively impact equity valuations and corporate profits, further pressuring equities
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