S&P 500 Earnings Yield vs Treasury Real Yield: Which Attracts Capital?
The article compares the S&P 500's forward earnings yield of 5.3% with a 10-year Treasury real yield near 3%. It argues the recent bond selloff may be overdone, especially at the front end, while higher nominal growth, sticky inflation, and a hawkish Fed keep bond vigilantes cautious. A 10-year real yield approaching 3% could pressure equities, and corporate bonds may face losses in an AI or economic slowdown given tight credit spreads.
The S&P 500's projected earnings yield sits at 5.3%, while the 10-year Treasury's inflation-adjusted yield is around 3%. The piece suggests the recent fixed-income selloff, particularly at the short end, may have gone too far, with limited term premium and markets pricing three quarter-point rate increases through 2027, including one in December.
It also notes the 5s30s curve gap at 64 basis points, near its long-run average, so long-dated yields do not look unusually high versus shorter maturities. Corporate bonds could lose value in an AI-driven or broader downturn, especially with credit spreads near decade lows.
Higher real yields could influence households, retirees, and institutional investors by altering the appeal of stocks versus government bonds. Savers may benefit from better Treasury returns, while equity valuations and corporate borrowing costs could face pressure. If credit spreads widen during a slowdown, bondholders and companies reliant on refinancing may feel strain. The outcome may shape retirement portfolios, pension funding, and access to capital across the economy.