The Gap Widens Between Bonds and Stocks - Chart Of The Day 13 June 2018 - Equitymaster
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The Gap Widens Between Bonds and Stocks
Jun 13, 2018


The earnings yield of the market vis-a-vis risk-free 10-year government bond yield is a very important indicator for equity markets.

The earnings yield is calculated as the net profit for the last 12-month period, divided by market capitalisation. In other words, it is the inverse of the PE Ratio.

This ratio can be used as a tool to identify how cheap or expensive the stock market is relative to the debt market, other any other possible investments.

Today's chart illustrates the same.

Lately, the divergence between bond yields and earnings yield has increased. This means stocks have become expensive compared to bonds.

Historically, there is a negative correlation between stock prices and the spread of bond yields over earnings yields.

The bond yields are now higher by 364 basis points (bps), compared to the average earnings yield of the BSE Sensex.

With this, the equity market might see more selling in the coming weeks, as there is still a large gap between the yield on the 10-year government bond and corporate earnings yield.

Thus, a 30% correction in the Sensex is a possibility.

Data Source: CMIE, BSE India

This Chart Of The Day was published in The 5 Minute WrapUp - If You're Worried About Rising Interest Rates, You Need to Read This...

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