Bond yields have risen. This, in theory, should make stocks less attractive in relative terms of valuation.
However, the stock market rally was hardly derailed because the yield at 10 years TMUBMUSD10Y Treasury,
reached 1.20% on Monday, extending the advance by almost a quarter of a point this year. US ES00 futures,
indicated an optimistic start on Monday, and European stocks rose. S&P 500 SPX,
it climbed almost 5% last week, setting the seventh record of the new year.
Société Générale strategies led by Roland Kaloyan examined the actions before the 10-year Treasury at a maximum level of 11 months. They looked at earnings yields – basically, the futures price turned into a head – and compared them to bond yields.
As the chart shows, the difference between earnings and bond yields is not as narrow as at the end of 2018, when stocks fell. The current spread suggests that stocks could absorb Treasury yields above 1.5%, strategists said. And assuming earnings continue to meet analysts’ expectations, US and European stock markets could absorb another 135 basis points tightening by the end of the year, strategists said.
Analysts expect S&P 500 earnings to rise 24% this year and 16% next year, and for the Stoxx Europe 600 SXXP,
companies’ earnings will increase by 41% this year and by 16% next year. “We remain constructive in the stock markets, but US and / or European companies do not deliver those EPS [earnings per share] growth expectations today represent a higher risk for (respective) indices of action than rising bond yields, ”strategists said.