Credit Calculus Turns Against Stocks With Yield Edge Over Bonds Vanishing

A valuation bulwark that had supported stocks relative to credit is starting to erode.

The model compares profit streams with interest rates. It shows the S&P 500’s earnings yield, the reciprocal of its price-earnings ratio, at around 5% now trails the rate from a lower tier of 10-year investment-grade bonds for the first time in more than a decade, according to Morgan Stanley data.

The last time the spread was negative in 2010, the S&P 500 went flat the following year, halting a two-year rally.

“Because the spreads on investment grade corporate bonds have recently widened, stocks no longer look attractively priced versus comparable corporate debt,” Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, wrote in a note to clients.