This should go without saying, but US equities still aren’t cheap.
I don’t know why anyone would be inclined to think they were. After all, the S&P’s not too far from record highs despite Donald Trump’s manifold “hell raising,” and full-year earnings estimates have come down, as they’re wont to do.
I suppose what I mean by “still” is that it feels like 2025’s been a rough year for US stocks, even though the S&P’s more or less flat. The sheer scope of the chaos — and pervasive uncertainty about the future — “should” translate into a discount for risk assets. Alas.
“While flat [for] the year, the S&P is now 5% more expensive than at the start of 2025,” SocGen’s Andrew Lapthorne noted on Monday, adding that at 22.7x, the benchmark’s trading “near historical highs” on a forward multiple.
As the simple chart illustrates, the S&P’s earnings yield isn’t materially different from the yield on benchmark US debt.
So, there’s no equity risk premium at a time when the C-suite’s flying almost entirely blind, the operating environment’s completely indeterminate and it’s almost impossible to plan ahead, which suggests profit forecasts are subject to even more variability than ever.
The punchline: That might make sense. Loaning money to the US government when Trump’s CEO is probably at least as risky as paying up for the equity of the 500 “best” companies in America, most of “whom” are run by eminently capable management teams.
Relatedly, BofA’s Michael Hartnett noted late last month that Microsoft pays less to borrow than the US government out to three years.
The figure above, from Hartnett, shows the spread between yields on the company’s long-term debt and 30-year Treasury yields. At just 20bps, it’s the tightest on record.
A few months ago, DoubleLine published a presentation called “Would You Rather Lend To The US Government Or Microsoft?” In it, PM Mariya Entina noted that Microsoft’s interest coverage ratio is nearly 54x.
The US government does have one thing going for it that Satya Nadella can’t boast of, though. America, Entina remarked, “can print money.” Somehow, that’s not as comforting as it once was.
“Loaning money to the US government when Trump’s CEO”, that really sums it up.
I’ve been finding high-IG corporate bonds generally unattractive given the tiny spread, but maybe the spread is deceiving because the risk-free asset is no longer. Wow, things could get pretty unmoored. Perhaps in future a basket of AAA corporates defines the risk-free rate.
Or maybe we use a weighted basket of G7 or G20 DM government yields, adjusted by FX-to-USD swap rates, instead of Treasuries.
JL – the first chart shows why I always tell you that in the aggregate, corporate earnings usually don’t matter to share prices. It’s not absolute, of course, but that’s a hard thing for older folks steeped in the idea that profits drive share prices to accept.
Not if Australia passes the proposed tax on unrealized gains and that idea eventually becomes popular in the USA as a means to fund growing deficits. Yikes!
Not sure what your “not if” refers to but our H suggested the same thing ( a tax on unrealized gains) just a few months ago. Irrespective of how you do it, increasing overall tax rates to near the G7 average would do wonders for reducing the deficit, and thereby making USTs risk free again.