In August 2020, long term treasuries (EDV) were trading at a 1.2% yield. Since then the SP500 is up 75% while the treasuries are down 50% due to rising rates.
What was the market using to discount future earnings back in late 2020? Surely it must be lower than what it is today given the big change upward in interest rates? If so, how can stocks rise so quickly?
Like if risk free rates are 1%, then equities could be justified if they returned 2-3%. But now that risk free is 4-5%+ then equities today need to return 6-7% minimum to be viable. Unless earnings can grow astronomically, it’s hard to see how such a big jump in equity yield can happen given the 75% rise in the SP500.
Either:
1) the market expected future earnings to be low in late 2020 and got that wrong. So, stocks rose quickly and were able to offset a big increase in discount rates as risk free rates rose.
2) the equity risk premium has gone down substantially
What was the market using to discount future earnings back in late 2020? Surely it must be lower than what it is today given the big change upward in interest rates? If so, how can stocks rise so quickly?
Like if risk free rates are 1%, then equities could be justified if they returned 2-3%. But now that risk free is 4-5%+ then equities today need to return 6-7% minimum to be viable. Unless earnings can grow astronomically, it’s hard to see how such a big jump in equity yield can happen given the 75% rise in the SP500.
Either:
1) the market expected future earnings to be low in late 2020 and got that wrong. So, stocks rose quickly and were able to offset a big increase in discount rates as risk free rates rose.
2) the equity risk premium has gone down substantially
Statistics: Posted by tcrez — Tue Jun 18, 2024 7:49 pm — Replies 0 — Views 81