The Reason To Hold Stocks Has Disappeared! The 10-Year US Treasury Yield Has Outperformed The S&P 500 Earnings Yield

For the past twenty years, investors have accepted one thing: putting money into the stock market will always yield a bit more profit in the long run than by holding government bonds. The extra profit is compensation for "potential losses." But now, that compensation is almost gone.

The 10-year Treasury yield closed at 5.2361% on September 28. On the same day, the S&P 500's price-to-earnings ratio calculated based on earnings for the next year was about 20 times — for every $100 invested, these companies earned you about $5 in a year. Subtracting the two, the remaining gap was so small it was almost invisible.

The weight of this matter should be viewed over a twenty-year span. After the financial crisis, stocks' earnings and returns have long been higher than government bonds, making it an undeniable common knowledge that "buying stocks is more cost-effective than government bonds." In earlier times, the market viewed the opposite: stocks should be more expensive and yields lower if they can grow. This scale tilting toward stocks was set after 2008 and is now being pulled away.

Robert Shiller of Yale University used a model to calculate results ten years later: over the next decade, the S&P 500 will earn only about 1% more annually than Treasuries. The accuracy of this model has declined in recent years, and the actual stock market has often outperformed it, so it cannot be used as a prediction. But its direction is clear: when you compare bonds and stocks, bonds have relative attractiveness at their highest level in a generation.

Why Can't Interest Rates Come Down?

Treasury yields didn't rise for no reason. Let's start with inflation: On September 28, Federal Reserve Governor Tim Cook made a statement that he was the most meticulous among this round of officials: too many data centers have been built, taking away the same electricity and construction workers, and electricity and water prices have risen about 5% over the past year; And the $2 trillion that companies pledged to invest has only been spent a small portion so far. She also pointed out a lesser-mentioned path: when the stock market rises, people feel they have money and spend more, which in itself pushes prices. Her conclusion is that the efficiency gains brought by AI "haven't come quickly enough" and cannot offset the remaining inflationary pressure this year. Energy is on the other side: On September 26, Trump rejected Iran's ceasefire proposal, then said talks would continue this week. Oil prices were held up amid repeated news, and when oil rose, inflation expectations followed.

Now, let's talk about the borrowers. The U.S. Congressional Budget Office estimates the federal deficit will be about $1.9 trillion in fiscal year 2026, and public holdings of federal debt will account for about 101% of GDP, rising to about 108% by 2030, surpassing the 106.1% at the end of World War II in 1946. For the government to keep issuing new debt, buyers naturally demand higher interest rates to accept.

If inflation doesn't go down, the Fed has no room to cut rates; The government keeps issuing new bonds. Yields are not market sentiment, but the result of these two factors coming together.

UBS reviewed history and found that after such a sharp rise in Treasury yields, as long as the Fed raises rates by no more than 1 percentage point in the coming year, the S&P 500 could average 18% in the coming year. RBC's 12-month target is 8,150 points, while warning that a 5% to 10% correction may occur in between; Its worst-case scenario is 3% inflation, four more rate hikes, and a 10-year yield of 5.25% all at once; even so, a reasonable valuation remains above 7,900 points. Capital Macro maintains the S&P 500's year-end forecast of 8,250 points, but expects it to fall to 6,500 points by the end of 2027, a 21% decline. Reasons include: valuations close to those seen during the internet bubble, large tech companies' free cash flow may turn negative next year, and many new stocks are still lining up.

There are two data points this week. On Wednesday (September 30), the August PCE Price Index will be released, with the market expecting an overall increase of 3.7% and a core increase of 3.3%; On Friday (October 2), September nonfarm payrolls will be released, with an expected increase of 84,000 to 100,000, compared to the previous value of 162,000. There are also 14 Fed official speeches scheduled in between.

If the data is soft, yields will fall, and stocks and bonds may rise together; If the data is tough, those above 5% are even more likely to stay, and the list of assets needing re-valuation will continue to grow. The late October policy meeting is the next check on this line.