Bond are Signaling P/E Compression for the Stock MarketMay 15, 2014
Bonds have had a great last few days as yields have fallen by the largest three-day amount since April of 2013. But, this rally in treasury bonds began at the start of the year and the ten-year now yields about 50bps less than it did then. This has created a divergence we are closely monitoring, which is the deteriorating relationship between ten-year treasury bond yields and the S&P 500 forward P/E ratio. Usually rising bond yields are accompanied by a higher stock multiple and vice verse. So far this year the relationship has not held and over the last few days the gap between the red line (yields) and blue line (forward P/E) in the chart below has grown wider. We suspect this relationship will reassert itself with either multiples falling or yields rising.