Taps Coogan – July 11th, 2023
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As we’ve discussed before, the rally in stocks this year continues to unmoor equities from the 10-year treasury, the long term ‘risk-free’ benchmark rate used for discounting cash flows and valuing investments. The latest example of that disconnect comes via Acemaxx Analytics:
The current P/E ratios have decoupled from one of their most fundamental drivers, 10y UST #real yield. This rate is the basic building block for discounting future cash flows, especially for long-duration growth stocks, chart @MorganStanley pic.twitter.com/ML6CGL6qF2
— ACEMAXX ANALYTICS (@acemaxx) July 11, 2023
The following chart, which we discussed here, gets at the same disconnect from a different angle:
What a great bargain pic.twitter.com/lniVguoWlo
— Win Smart, CFA (@WinfieldSmart) June 30, 2023
While the simultaneous rise of equities and long term yields can be interpreted as two manifestations of an increasingly bullish economic outlook, the existence of increasingly high ‘risk-free’ yields raises the stakes considerably for equities if the bullishness fades. There is clearly an alternative to stocks and while signs of bullishness appear in asset valuations, the real mystery is why that optimism still isn’t rubbing off on the actual earnings outlook.
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