Valuations of U.S. equities are getting into frothy territory once again. In the chart below, you can see the earnings yield of the U.S. stock market (inverse of P/E) minus the inflation adjusted 10 year treasury. It provides a measure of relative attractiveness between stocks and bonds. The lower the number, the less attractive (i.e. more expensive) stocks are vs bonds. It currently reads 1.1%, which is the level it was around the Great Financial Crisis, below the median of the last 40 years. The next likely move can take two forms: either bonds become more expensive than stocks by lowering their yield, or stocks correct in price to adjust the earning yield and place it above the median. Tipping point ahead.
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