Taps Coogan – February 20th, 2023

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In another sign of just how unfavorable the risk/reward of US equities is, the following chart from ISABELNET highlights that the anticipated earnings yield on the S&P 500 over the next 12 months is just 0.61% above the 6-month treasury bill yield. That’s the worst spread since the eve of the Dot-Com bubble popping.

Given the slew of recession warnings that have fired off over the past year, equity investors are holding quite a lot of risk to pick up virtually no expected earnings yield.

After a year of bearish action, it shouldn’t be a huge surprise that markets have rallied for a few months. Yet, quite a lot of people are starting to allow that rally to change their prior conviction that we were headed for a recession sometime later this year. That change comes without much of a change in the fundamental drivers of the recession forecast; the Fed is still tightening, the money supply is still shrinking, inflation is still far above 2%, etc…