Bond yields have increased. That, in theory, should make the stocks less attractive in terms of relative valuation. However, the stock market rally has barely been derailed as the 10-year Treasury yield TMUBMUSD10Y, 1,187% hit 1.20% on Monday, extending the advance of nearly a quarter point this year. US stock futures ES00, + 0.36% pointed to an optimistic start on Monday, and European stocks rose. The S&P 500 SPX, + 0.39%, was up nearly 5% last week as it posted its seventh new year high.
As the graph shows, the gap between earnings and bond yields is not as narrow as it was in late 2018, when stocks fell. The current spread suggests equities could absorb Treasury yields above 1.5%, strategists said. And assuming earnings continue to move in line with analyst expectations, the US and European equity markets could absorb another 135 basis points of adjustment by the end of the year, strategists said. Analysts expect earnings for the S&P 500 to grow 24% this year and 16% next, and for Stoxx Europe 600 SXXP, + 0.52% company earnings will grow 41% this year and 16% next. “We remain constructive in equity markets, but US and European companies are not meeting those earnings per share. [earnings per share] Growth expectations are probably a greater risk to (respective) equity indices today than rising bond yields, ”the strategists said.