Rates May Surge Higher, Killing The Equity Market Rally

Apple’s stock peaked on September 2 and the 10-year has been trending higher since. Notice that Apple’s stock hasn’t advanced; it has been essentially trending sideways.

Meanwhile, notice that in recent days the spread between Apple’s earnings yield and the 10-year has contracted some, as the price of the stock has risen. But if the yields continue to rise and for that earnings yield to rise, the price of Apple’s stock will need to fall to keep the spread constant; otherwise, the spread will need to contract further, which is possible.

Amazon (AMZN)’s is more of a free-cash-flow yield story, since earnings are anything but predictable for the company. The free cash flow yield has also followed the plunging rate on the 10-year.

Again, as rates rise, that free cash flow yield is likely to rise as well, which will be reflected by the price of the stock falling. Thus it makes paying attention to the 10-year rate perhaps more important than ever.

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Disclosure: Mott Capital Management, LLC is a registered investment adviser. Information ...

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