the US
Treasuries vs. the S&P 500
Putting on my pedant hat for a moment, there is in theory–and also in the real world–strictly speaking no demand for stocks. There is demand for liquid long-term investments, however. The principal two LTIs are the stock market and Treasuries. The Treasury bond market is much larger, more straightforward, and a highly regulated instrument of government policy. So in lots of ways it’s the dog and the S&P is the tail.
As I’m writing this, the PE on the S&P 500 based on anticipated 2024 earnings is about 27x. The ten-year Treasury is yielding about 4.2%. The standard way of comparing the two is to look at the bond yield vs. the earnings yield (the notional return in terms of an index holder’s share of S&P earnings (the “earnings yield”), or 1/PE. That’s 1/27 = 3.7%. If we assume earnings growth of, say, 10% for the index in 2025 (the Wall Street consensus is for +15%), the earnings yield on year-ahead results is about 4.1%.
In other words, stocks are roughly fairly valued right now vs. bonds.
As we now know, this time a year ago, stocks were substantially undervalued. Yet the Wall Street consensus back then was that a recession was imminent, corporate profits would contract, and therefore stocks would decline–a lot.
With 20/20 hindsight, we can see what brokerage house strategists missed:
–the huge earnings growth driven by AI, something like +40% for AAPL, META, GOOG, MSFT, NVDA, AMZN, driving these stocks substantially higher
—TSLA, up by about 70% post-election after having been flat for the year through Halloween–apparently on the idea that Trump will block companies like BYD, that have superior EV offerings, from entering the US market.
For 2025, it seems to me that:
–AI will continue to drive 2024 winners upward, but the bar for what will surprise the market on the upside will be considerably higher. So I’d guess that the AI universe will broaden and some money will flow from the 2024 winners to smaller-cap names
–the S&P 500 Value index is up by 28% ytd vs. +40% for S&P 500 Growth. My hunch is that 2025 will be a catch-up year for Value
–Trump is a wild card. It’s hard to know how much of his tariff and deportation rhetoric is calculated to achieve change by itself or whether the Republican party will actually raise tariff barriers and start deporting large swaths of the domestic work force. Either will doubtless damage economic growth in the US. But will, say, China begin to dump goods slated for the US into the EU, depressing growth there? Will that cause the dollar to rise, negating part of tariff impact but slowing growth here as “cheap” imports flow from Europe?
One thing appears to me to be certain, though. Trump seems so deeply beholden to ultra-wealthy individual backers that further personal income tax cuts for them will probably be high on his agenda.