Have Bonds Become More Attractive Than Stocks?

The Fed Model compares the S&P 500's (SPX) earnings yield with the yield on the 10-year U.S. Treasury to gauge whether stocks appear attractive relative to bonds. When the earnings yield falls below the 10-year Treasury yield, the model suggests equities may be overvalued because investors can earn a higher yield from the safer, risk-free Treasury market. From the 1980s through the late 1990s, Treasury yields generally exceeded the S&P 500's earnings yield, making bonds relatively more attractive. After the dot-com bubble burst in 2000, falling interest rates and improving equity valuations caused the earnings yield to move above Treasury yields, making stocks appear more attractive. That relationship largely persisted through 2022. However, rising interest rates in 2023 pushed the 10-year Treasury yield back above the S&P 500's earnings yield, suggesting that, under the Fed Model, stocks have become less attractive relative to bonds.

Source: Multpl, Board of Governors of the Federal Reserve System (US)

This graph was produced by Lucas Juery, CFA, CFPⓇ and is not intended to provide financial advice.