One of the Largest Valuation Disparities in 50 Years
A historically wide disparity exists between equity and bond valuations, setting the stage for three potential scenarios. Under any of these scenarios, we believe, equities would outperform.
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  • Despite bonds’ high valuations, there has been huge demand for the securities during the past decade with fixed income instruments attracting $1.6 trillion more in assets than U.S. equities.
  • The earnings yield for equities is more than 300 basis points* higher than 10-year Treasury notes versus a 50 basis points median over the past half century.

  • When considering the wide valuation disparity, a few scenarios are possible: fixed income yields could rise as their principal values decline, resulting in disappointing returns; equity yields could fall with P/E ratios rising, resulting in strong stock performance; or the yields for both asset classes could meet in the middle, with both bond losses and equity P/Es rising. Regardless, stocks would win.

*The earnings yield for the S&P 500 is determined by dividing the earnings of index constituents by the market value of the constituents. It is expressed as an earnings to price ratio. 100 basis points equals one percentage point.

S&P 500 is an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large cap universe, made up of companies selected by economists. The S&P 500 is a market value weighted index and one of the common benchmarks for the U.S. stock market. Index performance does not reflect deduction for fees, expenses, or taxes. Investors cannot invest directly in any index.

The views expressed are the views of Fred Alger Management, Inc. as of April 2017. These views are subject to change at any time and they do not guarantee the future performance of the markets, any security or any funds managed by Fred Alger Management, Inc. These views are not meant to provide investment advice and should not be considered a recommendation to purchase or sell securities. 

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Fred Alger & Company, Incorporated 360 Park Avenue South, New York, NY 10010 /

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