By Michael Wilson, chief US equity strategist at Rabobank
Alpha Over Beta
Since mid-December, the S&P 500 has made little headway. The impressive run that started in the summer came to a halt for a number of reasons, but none as important as the backup in 10-year UST yields, in my opinion. In December, we cited 4-4.5% on the 10-year as the sweet spot for equity multiples, assuming growth and earnings remained on track. We viewed 4.5% as a key level for equity valuations. Sure enough, when the Fed became less dovish at its December meeting, yields crossed that 4.5% threshold and correlations between stocks and yields settled firmly in negative territory, where they remain. In other words, yields are no longer supportive of higher valuations – a key driver of returns over the past few years.
