If you are worried that the stock market has gone up too far, you can always find an argument to soothe your fears, and encourage you to invest more. Here is the latest: Earnings are up a lot this year, justifying the rise in stocks.S&P 500 earnings are forecast to have their biggest rise
this year since the recovery after the financial implosion of 2008-09. True, a lot of that is about 2020 being so awful—but next year’s rise is also forecast to be a stunner, with Wall Street predicting a bigger rise than in all but two years in the past decade. The trouble with this line of reasoning is that it is hard to square with last year’s market logic. A year ago, we were a month into a rebound as the valuations of big technology stocks soared, something explained at the time by. That made sense: Lower bond yields make earnings that are expected to grow far into the future look more attractive, and Big Tech is full of those. Growth stocks were a great place to be as the longest-dated Treasury yields plumbed new lows.
Here we come to the problem: Just as lower yields justified a higher valuation for stocks last year, higher yields should mean a lower price-to-earnings multiple—albeit a lower multiple of much higher earnings. Instead, valuations have gone broadly sideways as bond yields first rose and then this month pulled back a bit. The result is that the stock market’s relationship with the bond market has gone haywire.
The strangeness shows up in the correlation between stocks and bond yields. Since the late 1990s higher yields have typically been good for stocks, so they tended to rise and fall together daily—even as over the long run, yields fell and stocks rose.