To defend soaring equity markets against claims of overinflation, economists often cite a valuation methodology that adjusts stock prices for interest rates. The latest to do it is Jerome Powell.

In his press conference Wednesday, the Federal Reserve chairman noted that relative to risk-free rates of return, a reference to Treasury yields, shares probably aren’t as overpriced as they appear at first blush. It makes sense Powell would cite the comparison — it’s a version of something that over the years has come to be known as the Fed model.

“If you look at P/Es they’re historically high, but in a world where the risk-free rate is going to be low for a sustained period, the equity premium, which is really the reward you get for taking equity risk, would be what you’d look at,” Powell said.

The S&P 500’s earnings yield — profit relative to share price — is 2.5 percentage points higher than the yield on 10-year Treasury notes. The comparison, known as the Fed model, sits well above what the spread was before the burst of the internet bubble, when bonds yielded more than equities by that measure.

“The PE mafia hates his answer, but it is what it is,” Dennis DeBusschere, head of portfolio strategy at Evercore ISI, said in a note to clients. “But fighting that battle is like trying to convince an extreme partisan to change her position.”

A look at equity risk premium offers a very different picture than a plain look at the S&P 500’s price-to-earnings ratio. Currently, the stock benchmark is trading at 29 times trailing earnings. In 1999, that metric surpassed 30.

“Admittedly P/Es are high but that’s maybe not as relevant in a world where we think the 10-year Treasury is going to be lower than it’s been historically from a return perspective,” Powell said.

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